# Investments: Bond valuation Flashcards

Coupon Rate

- periodic interest payment received by a bond holder

- coupon payment entered as a payment on the financial calculator

Par Value

- principal amount that will be repaid to bond investors at the end of the loan period.
- $1000 on bond issues unless stated otherwise

Length of time to maturity

- time remaining until the bond holder receives the par value.
- number of periods or loan will be outstanding

Market interest rates

- yield currently being earned in the marketplace on comparable securities.
- rate used to discount a bond to determine what it is currently selling for in the market

How does a rise in interest rates affect the bond market?

- investors can get a larger stream of cash flows (higher coupon) on new bonds from the corporation.
- current bond holders selling bonds must do so at a discount to stay competitive with new bonds

How do falling interest rates affect the bond market?

- coupon rates on new bonds (constant income stream) from corporations will be less than previous bonds making older bonds worth a premium.
- investors buying these older higher coupon bonds must pay a premium above par value

Coupon rate or nominal yield

Coupon Rate = coupon payment/par value

Current Yield

Current Yield = coupon payment/price of the bond

Current Yield - Example

Yield to maturity (YTM)

- compounded rate of return if an investor buys a bond today and holds it until maturity.
- assumes that an investor is able to reinvest coupon payments at the yield to maturity rate
- always assume semiannual compounding on the CFP exam unless told otherwise

Calculate Bond Holding Period Return

****important tested frequently

Yield to call (YTC)

- compounded rate of return if an investor buys a bond today and the bond is called (retired) by the issuer.
- when calculating:

Use number of periods until bond is called, not until maturity

-use call price, not the par value as FV

Yield Summary

Premium - YTM and YTC are smallest

Par - all elements are equal

Discount - YTM and YTC are biggest

The Yield Ladder

If you see a discount “Call Moms Cell Now!”

Accrued Interest

- when purchasing a bond, buyer pays seller interest that has accrued since last interest payment.
- buyer then received full amount of interest due at next interest payment.
- buyer receives a 1099-INT that reflects full periods interest received
- buyer received deduction equal to amount of accrued interest paid.