The valuation of bonds ppt @ bec doms finance

1. The Valuation and Characteristics of Bonds

10. Determining the Price of a Bond 10 0 1 5 10 $100 a year for 10 years $100 $1,000 $1,100 Example Q: A bond has 10 years to maturity, a par value of $1,000, and a coupon rate of 10%. What cash flows are expected from the bond? A:

12. Cash Flow Time Line for a Bond Figure 7.1 12 This is an ordinary annuity . This is a single sum.

15. Determining the Price of a Bond Example 7.1 15 Q: The Emory Corporation issued an 8%, 25-year bond 15 years ago. At the time of issue it sold for its par (face) value of $1,000. Comparable bonds are yielding 10% today. What must Emory’s bond sell for in today’s market to yield 10% (YTM) to the buyer? Assume the bond pays interest semiannually. Also calculate the bond’s current yield. Example

16. Bond Example Continued Example 7.1 16 A: Substituting the correct values into the equation gives us: Example This can also be calculated via a financial calculator: N PV PMT FV I/Y

18. Price Changes at Different Terms due to an Interest Rate Increase from 8% to 10% Table 7.1 18

20. Finding the Yield at a Given Price Example 7.3 20 Example Q: The Benson Steel Company issued a 30-year bond 14 years ago with a face value of $1,000 and a coupon rate of 8%. The bond is currently selling for $718. What is the yield to an investor who buys it today at that price? (Assume semiannual interest.)

28. Effect on Earnings Per Share—Diluted EPS Example 7.7 28 Example Q: Montgomery Inc. is a small manufacturer of men’s clothing with operations in Southern California. It issued 2,000 convertible bonds in 1999 at a coupon rate of 8% and a par value of $1,000. Each bond is convertible into Montgomery’s common stock at $40 per share. Management expected the stock price to rise rapidly after the convertible was issued and lead to a quick conversion of the bond debt into equity. However, a recessionary climate has prevented that from happening, and the bonds are still outstanding. In 2003 Montgomery had net income of $3 million. One million shares of its stock were outstanding for the entire year, and its marginal tax rate is 40%. Calculate Montgomery’s basic and diluted EPS. A: Basic EPS is the firm’s net income divided by the number of shares outstanding, or $3,000,000 ÷ 1,000,000 = $3.00.

34. Moody’s and S&P Bond Ratings Table 7.2 34