Leeds University

Business School

LUBS1035
Foundations of
Finance
2012/13

John Smith
Lecture 4: Bond Valuation

Overview of Lecture

Corporate Finance in the News

http://www.smh.com.au/business/the-665-million-man-41yearold-wiza
rd-of-oz-returning-to-sydney-with-a-fortune-20121019-27uz8.html

Accounting & Finance FilmSoc

The first film of the year to be screened is:

Rogue Trader
With introduction from John Smith
and FREE popcorn!
Wednesday 24th October 2012 at 6pm
Yorkshire Bank Lecture Theatre

Definition of a Bond

Bonds and Bond Valuation

Bonds and Bond Valuation

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 C [1 1/ (1 r )t ] / r
F / (1 r ) t
Present value
Present value
Bond value

of the coupons
of the face amount

Example 6.1
Semi-Annual Coupons

Example 6.1
Semi-Annual Coupons

Interest Rate Risk

Interest Rate Risk

Example 6.2
Current Events

Example 6.2
Current Events

Example 6.2
Current Events

Example 6.3
Bond Yields

Bond Yields

More about Bond Features

Example 6.2 ICO Bond

Bond Features

Terms of a Bond

Bond Ratings

Different Types of Bond

Bond Markets

Inflation and Nominal Rates

The Fisher Effect

Example 6.4
The Fisher Effect

Example 6.4
The Fisher Effect

From the Fisher effect, we have:

1 + R (1 + r ) (1 + h)
1.10 1.08
1.1880
Therefore, the nominal rate will actually be
closer to 19 per cent.

Activities for this Lecture