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Fundamentals of Corporate Finance
Chapter 6
Bond Valuation
Overview of Lecture
Corporate Finance in the News
Insert a current news story here to frame the material you will cover in the lecture.
Bonds and Bond Valuation
Bonds and Bond Valuation
Example of a Bond
You should use a relevant example of a bond from your own environment to illustrate the characteristics of a bond.
Bond Values and Yields
Bond Values and Yields
Bond Valuation
Bond Values and Yields
Pixie plc example
PV of Face Value:
Present value = £1,000/1.0810 = £1,000/2.1589 = £463.19
PV of Annuity:
Annuity present value = £80 (1 1/1.0810)/.08
= £80 (1 1/2.1589)/.08 = £80 6.7101 = £536.81
Bond Value:
PV of Face Value + PV of Annuity = £463.19 + £536.81 = £1,000
Bond Values and Yields
Bond Values and Yields
Bond Value Formula
If a bond has (1) a face value of F paid at maturity, (2) a coupon of C paid per period, (3) t periods to maturity, and (4) a yield of r per period, its value is:
Bond value [1 1/ (1 ) ] / / (1 ) Present value Present valueBond value of the coupons of the face amount
t tC r r F r
Example 6.1Semi-Annual Coupons
Example 6.1Semi-Annual Coupons
Interest Rate Risk
Interest Rate Risk
Example 6.2Current Events
Example 6.2Current Events
Example 6.2Current Events
Example 6.3Bond Yields
Bond Yields
Spreadsheet Strategies
You should show students how to calculate bond values and yields with a spreadsheet. It is also a good time to introduce your students to Solver and Goal Seek (or their equivalents).
More about Bond FeaturesExample 6.2 – ICO Bond
Bond Features
Terms of a Bond
Bond Ratings
Different Types of Bond
Bond Markets
Work the Web
Visit Euronext to see how bonds are being reported in real time.
You should also visit FT.Com to see the new bond issues in the previous week and discuss these.
Inflation and Nominal Rates
The Fisher Effect
Example 6.4The Fisher Effect
Example 6.4The Fisher Effect
From the Fisher effect, we have:
1+ (1+ ) (1+ )1.10 1.081.1880
R r h
Therefore, the nominal rate will actually be closer to 19 per cent.
The Term Structure of Interest Rates
Terminology
The Term Structure of Interest Rates
The Term Structure of Interest Rates
Bond Yields and the Yield Curve
Work the Web
You should visit FT.Com to discuss the most current Yield Curve for your region.
Activities for this Lecture
Thank You