Bonds

Money comes from 3 sources:

1. Debt

2. Common Stock

3. Preferred Stock

Bonds

DEBT - low risk IOU, pay back

principal + interest

Allied COMMON - own a piece of the

Food STOCK Allied Food Corp.

PREFERRED - certificates entitled

STOCK to share profit of

the company

Bonds

Bond: (coupon rate=100/1000 = 10%)

100 :interest or coupon

1,000 :par value = FV

(face value),

1,000 1 year = n always 1,000

Bond = 1 year to maturity

Value (life of the bond)

Bonds

N10%

Bond Price Calculation:

INPUTS

I/YR FVPMTPV

OUTPUT

1 1000-100

1000

Bonds

Bond Price Calculation Example:

Bond was bought 5 years ago.

1000 = FV

PMT 100 100 100 100 100

1 2 3 4 5 1991 1992 1993 1994 1995

1000 = PV n = 5

Yield to Maturity

100 1,000

Yield to Maturity

= 12% = Kd

n = 1

PV = ?

Bonds

N12%

Bond Price Calculation:

INPUTS

I/YR FVPMTPV

OUTPUT

1 1000-100

982

Bonds

ROI Bond Price

10% $1,000

12% $982

8% $1,018

• Interest rate Bond price

• Interest rate Bond price

Bonds

• When Yield to Maturity = Kd = ROI = 10% = Coupon Rate,

Then Bond price = par value = 1,000.

In real estate : refinance,

in bond : call provision.

Bonds

Example:

100 100 100 1,000

1 2 3

Bond value YTM = ROI = 9%

Bond price

PV = ?

= 1,025.3

Bonds

N9%

Bond Price Calculation:

INPUTS

I/YR FVPMTPV

OUTPUT

3 1000100

1,025.3

Bonds

If require ROI = 12% = Kps

DPS = 10

VPS =

DPs = 10

= 83.3

kps 0.12