FINA 2700 Chapter Notes - Chapter 6: Opportunity Cost
2 Jul 2019
School
Department
Course
Professor
Document Summary
Bonds and the bond market: governments and corporations borrow money for long term investments by selling (issuing)bonds to investors, the interest payment paid to the bondholders is called the coupon. This is the discount rate: the discount rate must capture the bond"s opportunity cost of capital the current rate of interest on similar risk investments. Interest rates and bond prices: the coupon rate and the discount rate are not necessarily the same! Example: example 1: calculate the current price of a 6. 5 % annual coupon bond, with a ,000 face value which matures in 3 years. Example #2: calculate the current price of a 6. 5 % annual coupon bond, with a ,000 face value which matures in 3 years. Example #3: calculate the current price of a 6. 5 % annual coupon bond, with a ,000 face value which matures in 3 years. Interest rates and bonds prices: notice from the last three examples how bond prices vary with interest rates.
