Summary

 A bond is a long-term promissory note

issued by a business or governmental
unit. The issuer receives money in
exchange for promising to make interest
payments and to repay the principal on a
specified future date.

7-1
Key Features of a Bond
 Par value – face amount of the bond, which
is paid at maturity (assume $1,000).
 Coupon interest rate – stated interest rate
(generally fixed) paid by the issuer. Multiply
by par to get dollar payment of interest.
 Maturity date – years until the bond must
be repaid.
 Issue date – when the bond was issued.
 Yield to maturity - rate of return earned on

a bond held until maturity (also called the

“promised yield”). 7-2
Summary
 Some special types of long-term financing
include zero coupon bonds, which pay
no annual interest but are issued at a
discount;
 Floating-rate debt, whose interest
payments fluctuate with changes in the
general level of interest rates;
 Junk bonds, which are high-risk, high-
yield instruments issued by firms that use
a great deal of financial leverage.
7-3
Summary
 A call provision gives the issuing
corporation the right to redeem the
bonds prior to maturity under specified
terms, usually at a price greater than the
maturity value.
 A firm will typically call a bond if interest
rates fall substantially below the coupon
rate

7-4
Summary
 A sinking fund is a provision that
requires the corporation to retire a
portion of the bond issue each year. The
purpose of the sinking fund is to provide
for the orderly retirement of the issue.

7-5
Summary
 The value of a bond is found as the
present value of an annuity (the interest
payments) plus the present value of a
lump sum (the principal).

7-6
Problem
 Renfro Rentals has issued bonds that
have a 10% coupon rate, payable
semiannually. The bonds mature in 8
years, have a face value of $1,000, and a
yield to maturity of 8.5%. What is the
price of the bonds?

7-7
Problem
 Jackson Corporation’s bonds have 12
years remaining to maturity. Interest is
paid annually, the bonds have a $1,000
par value, and the coupon interest rate is
8%. The bonds have a yield to maturity
of 9%. What is the current market price
of these bonds?

7-8
Problem
 The Pennington Corporation issued a new
series of bonds on January 1, 2018. The
bonds were sold at par ($1,000), had a
12% coupon, to mature in 30 years on
December 31, 2048. Coupon payments
are made semiannually (on June 30 and
December 31).

7-9
Problem
 a. What was the YTM on the date the
bonds were issued?

 b. What was the price of the bonds on

January 1, 2023 (5 years later), assuming
that interest rates had fallen to 10%?

7-10
Problem
 The Garraty Company has two bond
issues outstanding. Both bonds pay $100
annual interest plus $1,000 at maturity.
Bond L has a maturity of 15 years, and
Bond S has a maturity of 1 year.

7-11
Problem

 What will be the value of each of these

bonds when the going rate of interest is
(1) 5%, (2) 8%, and (3) 12%? Assume
that there is only one more interest
payment to be made on Bond S.

7-12
 Problem
 An investor has two bonds in his portfolio.
Each bond matures in 4 years, has a face
value of $1,000, and has a yield to maturity
equal to 9.6%. One bond, Bond C, pays an
annual coupon of 10%; the other bond, Bond
Z, is a zero coupon bond. Assuming that the
yield to maturity of each bond remains at
9.6% over the next 4 years, what will be the
price of each of the bonds at the following
time periods? Fill in the following table
7-13
Problem

7-14