BUSINESS FINANCE教学资料 Lecture 6.pptxVIP

Lecture 6 Bond ValuationWaquar Ahmadwa0004@surrey.ac.ukOverview of LectureBond BasicsDebt securities that corporations (or governments) issue to borrow money from the investing publicWhen a corporation wishes to borrow money from the public (not from banks) on a long-term basis, it does so by selling (issuing) debt securities called bondsA typical bond has a fairly simple structureYou loan a company some moneyThe company pays you interest every periodThe company repays amount it borrowed at end of loanUsually bonds have an active secondary marketBond Basics: TerminologyFace Value (or Par Value)Principal amount repaid at end of loanCouponRegular periodic interest paymentUsually paid in cash, every 6 months (semi-annual)Coupon RateCoupons per year quoted as percentage of face valueMaturityTime until face value is paid (usually in years)Bond Basics: Terminology PricePresent value of expected future cash flows discounted at the market rate of interestWhat it would cost to buy the bond today on the marketYield to maturity (YTM)Rate of return on the bond if held to maturityRequired market rate of return on similar bonds Rate that equates bond’s discounted cash flows with its priceCurrent YieldAnnual coupon / priceBe Careful! Coupon rate ≠ YTM ≠ Current YieldBond Values and YieldsBond Values and YieldsBond ValuationBond Values and YieldsPV of Face Value: Present value = ￡1,000/1.0810 = ￡1,000/2.1589 = ￡463.19PV of Annuity: Annuity present value = ￡80 x (1 - 1/1.0810)/.08 = ￡80 x (1 - 1/2.1589)/.08 = ￡80 x 6.7101 = ￡536.81Bond Value: PV of Face Value + PV of Annuity = ￡463.19 + ￡536.81 = ￡1,000Bond Values and Yields ￡935.82￡1,147.20Bond Values and YieldsDiscount and Premium BondsIf YTM = coupon rate, then bond price= face valueIf YTM coupon rate, then bond price face valueValue below par = “discount” bondIf YTM coupon rate, then bond price face valueValue above par = “premium” bondBond Value FormulaIf a bond has (1) a face value of F paid at maturity, (2) a coupon of