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Bonds and Their Valuation: Key Features of Bonds Bond Valuation Measuring Yield Assessing Risk
Bonds and Their Valuation: Key Features of Bonds Bond Valuation Measuring Yield Assessing Risk
CHAPTER 8
Bonds and Their Valuation
0 1 2 n
k
...
Value CF1 CF2 CFn
ki = k* + IP + LP + MRP + DRP.
kd = 10%. M
1,000
837
kd = 13%.
775
30 25 20 15 10 5 0
Years remaining to Maturity
Copyright © 2001 by Harcourt, Inc. All rights reserved.
8 - 15
Find kd
INT ... + INT M
VB 1 + N + N
1 + k d 1 + k d 1 + k d
90 90 1000
,
887 1 + ... + 10 +
1 + k d 1+ k d 1 + k d
10
Definitions
Change in price
Capital gains yield = .
Beginning price
$90
Current yield = $887
= 0.1015 = 10.15%.
Value
10-year
1,500
.
1,000
. . . 1-year
.
500
0 kd
0% 5% 10% 15%
Semiannual Bonds
1. Multiply years by 2 to get periods = 2n.
2. Divide nominal rate by 2 to get
periodic rate = kd/2.
3. Divide annual INT by 2 to get PMT =
INT/2.
Financial performance
Debt ratio
TIE, FCC ratios
Current ratios
Other factors
Earnings stability
Regulatory environment
Potential product liability
Accounting policies
Bankruptcy