FINA 365 Final Exam
Bond Valuation (5.3 and 6)
Bond Terminology
Par Value (Face Value)- The fixed principal amount that the bond issuer promises to
repay at maturity
Maturity Date- The date on which the issuer r
...
FINA 365 Final Exam
Bond Valuation (5.3 and 6)
Bond Terminology
Par Value (Face Value)- The fixed principal amount that the bond issuer promises to
repay at maturity
Maturity Date- The date on which the issuer repays the bond’s par value
Term to Maturity- The number of periods remaining until the bond maturity date
Coupon- The fixed dollar or percentage interest payment that the bond issuer promises
to pay each period
Types of Bonds
By Issuer:
o Treasury securities
o Municipal bonds
o Corporate debt instruments
By Term to Maturity:
o Less than 1 year: Money market Instruments
Treasury bills (government debt)
Commercial paper (corporate debt)
o 1 to 10 years: Notes
o Greater than 10 years: Bonds
By Security Features:
o Collateral trust bonds are secured by some property or other assets
o Debenture bonds are not secured by any specific collateral
o Subordinated in the priority of claim on the issuer’s assets in case of default
Zero-Coupon (Discount) Bonds
Consols and Preferred Stocks
Consol is a bond with no final maturity date, and thus perpetual coupon payments
o English Consols issued by Bank of England in the 18th century still trade
o U.S. government once sold consols to finance the Panama Canal project. They
had a call provision and have been bought back from the holders
Preferred Stock: provides the holder a fixed dividend in perpetuity (however, the
company can suspend that dividend without going into default). It can be valued in the
same way as a consol
Coupon Bonds
Yield to Maturity (YTM)
YTM is the discount rate that equated the present value of all future cash flows over the
bond’s remaining life to its current market price (i.e. the IRR of the bond)
o If YTM = coupon rate, bond sells at par
o If YTM > coupon rate, bond sells at discount
o If YTM < coupon rate, bond sells at premium
The bond’s YTM is its interest rate
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