Please enable JavaScript.
Coggle requires JavaScript to display documents.
Lecture 4: Bonds and Their Valuation - Coggle Diagram
Lecture 4: Bonds and Their Valuation
What is a Bond?
A long term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.
Zero Coupon Bond
Coupon Bond
Key Features of a Bond
Par Value
Face amount of the bond, which is paid at maturity (assume $1000)
Maturity Date
Yield to Maturity
Nominal rate of return earned on a bond held until maturity
Coupon
Amount paid by the issuer regularly
Coupon interest rate
Stated interest rate (generally fixed) paid by the issuer, Multiply by par value to get dollar payment of interest.
Types of Bond Values
Par
Yield = coupon rate, bond price = par value
Discount
Yield > coupon rate, bond price < par value
Premium
Yield < Coupon rate, bond price > par value
Value of Financial Assets
Discount Rate
Opportunity cost of debt capital, and is the rate that could be earned on alternative investments of equal risk. AKA required rate of return / yield to maturity.
r = r* + IP + MRP + DRP + LP
The Total Return Identity
Semi-Annual Bonds
Multiply years by n
Divide nominal rate by n
Divide annual coupon by n.
Risks of a Bond
Investment Risk
Interest Rate Risk (Price Risk)
Reinvestment Risk
Default Risk
