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Lecture Financial markets and institutions - Chapter 8 presents the following content: Bond valuation process; relationships between coupon rate, required return, and bond price; explaining bond price movements; sensitivity of bond prices to interest rate movements; bond investment strategies used by investors; return and risk of international bonds. | Chapter 8 Bond Valuation and Risk Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Chapter Outline Bond valuation process Relationships between coupon rate, required return, and bond price Explaining bond price movements Sensitivity of bond prices to interest rate movements Bond investment strategies used by investors Return and risk of international bonds Bond Valuation Process Bonds: Are debt obligations with long-term maturities issued by government or corporations to obtain long-term funds Are commonly purchased by financial institutions that wish to invest for long-term periods The appropriate bond price reflects the present value of the cash flows generated by the bond (i.e., interest payments and repayment of principal): Computing the Current Price of A Bond A 2-year bond has a par value of $1,000 and a coupon rate of 5 percent. The prevailing annualized yield on other bonds with similar characteristics is 7 percent. What is the appropriate market price of the bond? Bond Valuation Process (cont’d) Bond valuation with a present value table Present value interest factors in Exhibit 8A.3 can be multiplied by coupon payments and the par value to determine the present value of the bond Impact of the discount rate on bond valuation The appropriate discount rate for valuing any asset is the yield that could be earned on alternative investments with similar risk and maturity Investors use higher discount rates to discount the future cash flows of riskier securities The value of a high-risk security will be lower than the value of a low-risk security Computing the Current Price of A Bond Using PVIFs A 2-year bond has a par value of $1,000 and a coupon rate of 5 percent. The prevailing annualized yield on other bonds is 7 percent. What is the appropriate market price of the bond using PVIFs? Bond Valuation Process (cont’d) Impact of the timing of payments on . | Chapter 8 Bond Valuation and Risk Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Chapter Outline Bond valuation process Relationships between coupon rate, required return, and bond price Explaining bond price movements Sensitivity of bond prices to interest rate movements Bond investment strategies used by investors Return and risk of international bonds Bond Valuation Process Bonds: Are debt obligations with long-term maturities issued by government or corporations to obtain long-term funds Are commonly purchased by financial institutions that wish to invest for long-term periods The appropriate bond price reflects the present value of the cash flows generated by the bond (i.e., interest payments and repayment of principal): Computing the Current Price of A Bond A 2-year bond has a par value of $1,000 and a coupon rate of 5 percent. The prevailing annualized yield on other bonds with .
