bond valuation

BOND !!!• Coupon = income over holding period•Term to maturity = number of years to expire• Usually issuers agree to pay fixed interest on every six months and principal at the date of maturity• MONEY MARKET when maturity less than 1 year, NOTES when above 1year but less than 10 years, BONDS when maturities excess 10 years

HPR= holding period return HPY= holding period yield

TAX effect

i= coupon rateT= tax rate

If i is 5% and tax rate is 20% then equivalent taxable yield (ETY) ?

8% coupon bond, matures in 20 years with par value of $1000.YTM is 10%. 1. What is coupon?2. YTM?3. Value of Bond?

If YTM changes to 6%?

1. If yield <coupon rate then , bond will be priced at a premium2. If yield> coupon rate then, bond will be priced at a discount3. Price-yield relationship is convex

i is expected or promised yield. Pm is current market price and promised price.

Yield is determining factor

Nominal yield = a bond with 8% coupon has 8% nominal yieldCurrent yield

REASON of changing Yield?

• Liquidity• Expectation• Volatility of interest rate

The annual interest is Rs 60 on the current investment of Rs 883.40. Therefore, the current rate of return or the current yield is: 60/883.40 = 6.8 per cent.

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The value of the bond declines as the market interest rate (discount rate) increases.