Chapter3 bonds BOND PRICING PREMIUM AND DISCOUNT Salma

Chapter#3 bonds: BOND PRICING PREMIUM AND DISCOUNT Salma Alsuwail

Summary ✘ What is a Bond? A bond is a type of loan. The party who issues a bond, called a bond issuer, borrows money from the party who purchases the bond, called a bond investor. There are two kind of bonds: accumulation bonds and bonds with coupons. The time at which the loan is repaid is called the maturity date (or redemption date). 1 -In the case of accumulation bonds, the borrower agrees to pay the loan plus interest at a unique date, called the redemption time. An accumulation bond is also called a zero coupon bond. 2 -The most common bonds are bonds with coupons. For bonds with coupons, the borrower agrees to make period payments (coupons) plus a large payment (the redemption value) C at the maturity date. . 2 Salma Alsuwail

✘ Variables for a bond: P : The price of a bond. r : The coupon rate per coupon payment period. F : The face amount, also called the par value, which determines the coupon payment amount. The amount of each coupon payment is Fr. Note the face amount itself is not a cash flow. C: The redemption value paid on the bond's maturity date. Unless stated otherwise, assume C=F. i: The investor’s effective yield rate per coupon payment period. n : The number of coupon payments. 3 Salma Alsuwail

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examples ✘ A 1, 000 Bond with coupon rate r convertible semi-annually will be redeemed at par in k years. Purchase price to yield 10% convertible semi-annually is P. If coupon rate were r – 0. 04, the price of the bond would be P – 200. Determine the present value of a 3 K year annuity immediate with semi-annual payments of 100 at a yield rate of 10% convertible semi-annual. A 1545 B 1670 C 1710 D 1750 E 1810 6 Salma Alsuwail

✘ You are given the following information on a bond: Par value = 1000 Redemption value = 1000 Coupon rate = 12 percent, convertible semi-annually It is priced to yield 10 percent, convertible semi-annually The bond has a term of n years. If the term of the bond is doubled, the price will increase by 50. Calculate the price of the n-year bond. A 1050 B 1100 C 1150 D 1200 E 1250 7 Salma Alsuwail

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✘ A 15 -year bond yields 7. 00% per annum convertible semi-annually. Coupons are paid quarterly at 6. 00% per annum. The bond is redeemed at 105% of par value at maturity. What is the discount of the bond if the par value is 1, 000? A 69 B 137 C 92 D 83 E 119 9 Salma Alsuwail

THANKS! Any questions? 10 Salma Alsuwail