01-14-2012, 05:19 PM
CHAPTER 5: HOW TO VALUE BONDS AND STOCKS
(Assigned problems are 1, 4, 5, 7, 8, 9, 13, 16, 17, 18, 21, 22, 23, 25, 26, 29, 31, and 33. Omit
the Appendix to this chapter). This notes package contains two Addendums.
I. BOND VALUATION
Bonds are “Fixed Income” securities, since the cash flows that the bondholder will
receive have been fixed or prespecified in the bond contract.
The current fundamental or intrinsic value of a bond (or any other financial asset)
is equal to the Present Value or PV0 of all future expected cash flows.1
An investor’s actual return on a bond, for any holding period, comes in two forms:
(1) the coupon yield (from the payment of coupon interest)
(2) the capital gain (bond’s change in price)
Zero Coupon Bonds: a zero coupon bond will pay its stated face or par value
at maturity. It pays no other future cash flows during its life. Zeroes are al
(Assigned problems are 1, 4, 5, 7, 8, 9, 13, 16, 17, 18, 21, 22, 23, 25, 26, 29, 31, and 33. Omit
the Appendix to this chapter). This notes package contains two Addendums.
I. BOND VALUATION
Bonds are “Fixed Income” securities, since the cash flows that the bondholder will
receive have been fixed or prespecified in the bond contract.
The current fundamental or intrinsic value of a bond (or any other financial asset)
is equal to the Present Value or PV0 of all future expected cash flows.1
An investor’s actual return on a bond, for any holding period, comes in two forms:
(1) the coupon yield (from the payment of coupon interest)
(2) the capital gain (bond’s change in price)
Zero Coupon Bonds: a zero coupon bond will pay its stated face or par value
at maturity. It pays no other future cash flows during its life. Zeroes are al
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