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FINANCE Lecture Notes - United States Treasury Security, Notional Amount, Cash Flow

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Fordham University
Department
Finance
Course
FINANCE
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Document Summary

Finance chapter 6: valuing bonds: bond cash flows, prices & yields. Bond: security sold by governments & corporations to raise money from investors today in exchange for future payments. Bond certificate: indicates the amounts & dates of all payments to be made until the maturity date. 2)face/principal value: notional amount used to compute interest payments; is repaid at maturity. Coupon rate: set by issuer & stated on bond certificate; determines amount of each coupon payment. Zero-coupon bond: simplest type of bond; does not make any coupon payments, only face value cash payment on maturity date; example: treasury bills. Treasury bills: us government bonds with maturity of up to one year: price of zero-coupon bond is less than face value (pv of future cash flow is less than cash flow itself) Thus: zero-coupon bonds trade at discount, so they are called pure discount bonds.

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Related Questions

Problem 24-12

Boeing Corporation has just issued a callable (at par) three-year, 5% coupon bond with semi-annual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment date. It has a price of $99. What is the bond’s yield to maturity and yield to call?

Coupon Rate %5.00
Payment Frequency semi-annually
Time until first call date (years) 2
Term of bond (years) 3
Call Price $100.00
Current Price $99.00
Coupon Payment
Yield to Call
Yield to Maturity

You own some bonds issued by Another Failing Airline Inc. (AFA). When AFA issued the bonds it was in good financial health and was able to get a coupon rate of 6.6%. The bonds pay coupons annually, and have exactly 10 years remaining until maturity. Each bond has a face value of $1000. Due to the recent increase in operating costs, most notably fuel prices, AFA is no longer able to pay the coupon payments on its bonds. At a creditors meeting, bond holders agreed to forgive the next 3 interest payments (starting with the payment due one year from today). This means that the next interest payment on the bonds will be made 4 years from today. After that, interest payments will be made annually until maturity. Given the risk of AFA and its recent credit downgrade to CC, the required return on these bonds is now 24.2%. What is the fair price of one AFA bond?

1.

a, You own bonds with 7 years remaining to maturity. The bonds have a $10,000 par value, the coupon payment every year is $375, and the bonds have a yield to maturity of 4.9%. What is the current market price of these bonds?

b, If the bond in question a sold at par (price = face value), explain why the yield to maturity would be the same as the coupon rate.

c, What is the duration of a two-year bond that pays an annual coupon of 5%, returns the face value, and has a current yield to maturity of 4.5%. Use $1000 as the face value.

d, What is the duration of a two-year zero-coupon (principal-only) bond that is yielding 6% and $10,000 face value? Note: This bond does not have coupon payments but does return the face value.