Ch 07- Video Lesson - Bonds and Their Valuation
r_(d) : the market rate of the interest on the bond. This is not the coupon interest rate, however r_(d) may be equal to the coupon rate at times.
N : the number of years before the bond matures, which is 13 years in this case
INT: dollars of interest paid each year. This is equal to the coupon rate times the par value, which is you calculated earlier as $100.
M: the par, or maturity, value of the bond, or $1,000 in this case
Although the coupon rate remains fixed after the bond is issue, interest rates in the market move up and down. Whenever the going rate of interest rises above the coupon rate, a fixed-rate bond's price will fall below its par value, so this bond is called a discount bond.
On the other hand, if the going rate of interest falls below the coupon rate, a fixed-rate bond's price will rise above its par value, so this bond is called a premium bond.
So what is the bond's current market price if the yield to maturity is 11% ? While it is possible to discount each cash flow back to the present and sum those present values to find the bond's value, this is a very time-consuming method. Instead, you may use a financial calculator to solve the problem:
able[[Input,13,11,,$100,$1,000
Ch O7-Video Lesson-Bonds and Their Valuation
rd:
the market rate of the interest on the bond.This is not the coupon interest rate, however r may be equal to the coupon rate at
times.
N: the number of years before the bond matures,which is 13 years in this case INT: dollars of interest paid each year. This is equal to the coupon rate times the par value,which is you calculated earlier as $100. M: the par,or maturity,value of the bond,or $1,000 in this case
Although the coupon rate remains fixed after the bond is issue, interest rates in the market move up and down. Whenever the going rate of interest rises above the coupon rate,a fixed-rate bond's price will fall below its par value, so this bond is called a discount bond. On the other hand, if the going rate of interest falls below the coupon rate, a fixed-rate bond's price will rise above its par value, so this bond is called a premium bond So what is the bond's current market price if the yield to maturity is 11%? While it is possible to discount each cash flow back to the present and sum those present values to find the bond's value, this is a very time-consuming method. Instead, you may use a financial calculator to solve the problem:
Input
13 11 Keystroke N I/Y
$100
$1,000
PV
PMT
FV
Output
-$932.50
In this case, the bond's coupon rate 10%) is less than the current market interest rate 11%, so this bond is a discount bond. Suppose a bond has a par value of $1,000.If the bond's coupon rate is 10% and the current market interest rate is 5%,the bond's current Vits par value,so this bond is called a bond market price is
