Outline of Session Outline of Session 4
Outline of Session Outline of Session 4 Outline of Session Outline of Session 4
Bond Valuation We use the DCF method to value a bond and get the bond price. To value a bond, we just discount periodic interest payments and face value of a bond at the prevailing market interest rate appropriate for its risk class. Bond Price = Int 1 + 2 ( 1 + YTM) ( ) ( ) N Yield−to−Maturity (YTM) is a discount rate that solves the above equation. Int Bond price and its yield is jointly determined. Last Updated: June 11, 2009 © 2009 Charn Soranakom, Ph.D. Session 4 | Slide 4 of 19 2 1 + YTM Int + ... + N + Face Value 1 + YTM
Calculation of Bond Price Example: A 5−year 5%−coupon government bond is being issued. This bond pays interest annually. Its face value is 100,000 Baht. The prevailing market interest rate for a 5−year risk−free bond is 5%. 5,000 5,000 5,000 5,000 5,000 + 100,000 Bond Price = + + + + 5 2 3 4 ( 1 + 5% ) ( 1 + 5% ) ( 1 + 5% ) ( 1 + 5% ) ( 1 + 5% ) = 100,000 Baht Last Updated: June 11, 2009 © 2009 Charn Soranakom, Ph.D. Session 4 | Slide 5 of 19
- Page 1 and 2: Outline of Session 4 Three Basic Va
- Page 3: Bonds Bonds are one type of fixed i
- Page 7 and 8: These curves are convex. Last Updat
- Page 9 and 10: Interest Rate Risk (or Price Risk)
- Page 11 and 12: Stocks and the Stock Market Stocks
- Page 13 and 14: P P 0 1 = = Div 1 ( 1 + r ) ( 1 + r
- Page 15 and 16: Where Does g Come From? Year 1 2 3
- Page 17 and 18: Preferred stock is classified as e
- Page 19: In−class Exercises Let’s do som
Calculation <strong>of</strong> Bond Price<br />
Example:<br />
A 5−year 5%−coupon government bond is<br />
being issued.<br />
This bond pays interest annually.<br />
Its face value is 100,000 Baht.<br />
The prevailing market interest rate for a<br />
5−year risk−free bond is 5%.<br />
5,000 5,000 5,000 5,000 5,000 + 100,000<br />
Bond Price = + + + +<br />
5<br />
2<br />
3<br />
4<br />
( 1 + 5% ) ( 1 + 5% ) ( 1 + 5% ) ( 1 + 5% ) ( 1 + 5% )<br />
= 100,000 Baht<br />
Last Updated: June 11, 2009 © 2009 Charn Soranakom, Ph.D. <strong>Session</strong> 4 | Slide 5 <strong>of</strong> 19
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