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Lecture 7

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Bond Prices Example If today is October 2001, what is the value of the following bond? An IBM Bond pays $115 every Sept for 5 years. In Sept 2006 it pays an additional $1000 and retires the bond. The bond is rated AAA (WSJ AAA YTM is 7.5%) Cash Flows Sept 0203040506 1151151151151115

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Bond Prices Example continued If today is October 2001, what is the value of the following bond? An IBM Bond pays $115 every Sept for 5 years. In Sept 2006 it pays an additional $1000 and retires the bond. The bond is rated AAA (WSJ AAA YTM is 7.5%)

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Bond Prices & Yields Yield Price

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Yield To Maturity All interest bearing instruments are priced to fit the term structure This is accomplished by modifying the asset price The modified price creates a New Yield, which fits the Term Structure The new yield is called the Yield To Maturity (YTM)

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Yield to Maturity Example A $1000 treasury bond expires in 5 years. It pays a coupon rate of 10.5%. If the market price of this bond is 107.88, what is the YTM?

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Yield to Maturity Example A $1000 treasury bond expires in 5 years. It pays a coupon rate of 10.5%. If the market price of this bond is 107.88, what is the YTM? C0C1C2C3C4C5 -1078.801051051051051105 Calculate IRR = 8.5%

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Bond Prices & Yields Yield Price

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Bond A YTM = 4.00% Maturity = 8 years Coupon = 6% or $60 Par Value = $1,000 Price = $1,134.65 Bond B YTM = 3.50% Maturity = 5 years Coupon = 7% or $70 Par Value = $1,000 Price = $1,158.03

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Bond A YTM = 4.75% Maturity = 8 years Coupon = 6% or $60 Par Value = $1,000 New Price= $1,108.61 Price dropped by 2.30 % Bond B YTM = 4.25% Maturity = 5 years Coupon = 7% or $70 Par Value = $1,000 New Price =$1,121.57 Price dropped by 3.15 % Yields increased 0.75%...prices dropped differently

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Class examples Homework FinCoach 5 Bond price problems 5 Bond YTM problems

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Valuing Debt Chapter 24. Topics Covered The Classical Theory of Interest Duration and Volatility The Term Structure and YTM Explaining the Term.

Valuing Debt Chapter 24. Topics Covered The Classical Theory of Interest Duration and Volatility The Term Structure and YTM Explaining the Term.

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