Interest Rates and Bond
Valuation
Chapter Number Chapter 6
Subject COF
Interest Rates and Bond Valuation 1
, 📖 Table of Contents
Outline
6.1 Interest Rates and Required Returns
INTEREST RATE FUNDAMENTALS
Negative Interest Rates
Nominal and Real Interest Rates
Nominal Interest Rates, Inflation, and Risk
TERM STRUCTURE OF INTEREST RATES
Yield Curves
Theories of the Term Structure
RISK PREMIUMS: ISSUER AND ISSUE CHARACTERISTICS
6.2 Government and Corporate Bonds
LEGAL ASPECTS OF CORPORATE BONDS
Bond Indenture
Trustee
COST OF BONDS TO THE ISSUER
1. Impact of Bond Maturity
2. Impact of Offering Size
3. Impact of Issuer’s Risk
Impact of the Cost of Money
GENERAL FEATURES OF A BOND ISSUE
conversion feature
call feature
stock purchase warrants
BOND YIELDS
BOND PRICES
BOND RATINGS
COMMON TYPES OF BONDS
INTERNATIONAL BOND ISSUES
6.3 Valuation Fundamentals
KEY INPUTS
1. Cash Flows
2. Timing
3. Risk and Required Return
BASIC VALUATION MODEL
6.4 Bond Valuation
BOND FUNDAMENTALS
BOND VALUATION
SEMIANNUAL INTEREST RATES AND BOND VALUES
CHANGES IN BOND VALUES
Interest Rates and Bond Valuation 2
, Required Returns and Bond Values
Calculating Percentage price change
Time to Maturity and Bond Values
YIELD TO MATURITY (YTM)
6.1 Interest Rates and Required Returns
INTEREST RATE FUNDAMENTALS
📍 interest rate: Usually applied to debt instruments such as bank loans or
bonds; the compensation paid by the borrower of funds to the lender; from
the borrower’s point of view, the cost of borrowing funds.
📍 required return: Usually applied to equity instruments such as common
stock; the cost of funds obtained by selling an ownership interest.
historical perspective: forward-looking perspective:
what return did an investment actually what return should we expect the
provide? investment to provide in the future given
its risk?
The equilibrium interest rate, r0, occurs at the intersection of the supply function (labeled S0) and
the demand function (labeled D).
Interest Rates and Bond Valuation 3
Valuation
Chapter Number Chapter 6
Subject COF
Interest Rates and Bond Valuation 1
, 📖 Table of Contents
Outline
6.1 Interest Rates and Required Returns
INTEREST RATE FUNDAMENTALS
Negative Interest Rates
Nominal and Real Interest Rates
Nominal Interest Rates, Inflation, and Risk
TERM STRUCTURE OF INTEREST RATES
Yield Curves
Theories of the Term Structure
RISK PREMIUMS: ISSUER AND ISSUE CHARACTERISTICS
6.2 Government and Corporate Bonds
LEGAL ASPECTS OF CORPORATE BONDS
Bond Indenture
Trustee
COST OF BONDS TO THE ISSUER
1. Impact of Bond Maturity
2. Impact of Offering Size
3. Impact of Issuer’s Risk
Impact of the Cost of Money
GENERAL FEATURES OF A BOND ISSUE
conversion feature
call feature
stock purchase warrants
BOND YIELDS
BOND PRICES
BOND RATINGS
COMMON TYPES OF BONDS
INTERNATIONAL BOND ISSUES
6.3 Valuation Fundamentals
KEY INPUTS
1. Cash Flows
2. Timing
3. Risk and Required Return
BASIC VALUATION MODEL
6.4 Bond Valuation
BOND FUNDAMENTALS
BOND VALUATION
SEMIANNUAL INTEREST RATES AND BOND VALUES
CHANGES IN BOND VALUES
Interest Rates and Bond Valuation 2
, Required Returns and Bond Values
Calculating Percentage price change
Time to Maturity and Bond Values
YIELD TO MATURITY (YTM)
6.1 Interest Rates and Required Returns
INTEREST RATE FUNDAMENTALS
📍 interest rate: Usually applied to debt instruments such as bank loans or
bonds; the compensation paid by the borrower of funds to the lender; from
the borrower’s point of view, the cost of borrowing funds.
📍 required return: Usually applied to equity instruments such as common
stock; the cost of funds obtained by selling an ownership interest.
historical perspective: forward-looking perspective:
what return did an investment actually what return should we expect the
provide? investment to provide in the future given
its risk?
The equilibrium interest rate, r0, occurs at the intersection of the supply function (labeled S0) and
the demand function (labeled D).
Interest Rates and Bond Valuation 3
