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1、Chapter10BondBasicsWHATISABOND?Abondisadebtsecurity,similartoanI.O.U.Whenyoupurchaseabond,youarelendingmoneytoagovernment,municipality,corporation,federalagencyorotherentityknownastheissuer.IssuerCouponrate(interestrate)Facevalue/parvalue(principal)MaturityPr
2、iceClassificationofbondsBondsareoftenclassifiedaccordingtothetypeofissuer.treasurybondsagencybondsmunicipalbondscorporatebondsTable1BondRatingsbyMoody’s,StandardandPoor’s,andFitchJunkBonds:EverythingYouNeedToKnowFluctuationsinBondPrices----DifferentinCoupons
3、andEqualMaturityDatesCurrentrateofinterest(%)Prices:BondA8%coupon,10yearstomaturityBondB14%coupon,10yearstomaturity4$1,324$1,81161,1471,58981,0001,403108771,246146871,000166139031855182020497748WordsandExpressions:facevalueparvaluecouponmaturityrisk-freeasset
4、srisk/returntradeoffcreditratingblue-chipfirmsjunkbondyieldtomaturityliquidityriskcallriskgovernmentbondsmunicipalbondscorporatebondsFutureValueFutureValueisthevalueonsomefuturedateofaninvestmentmadetoday.FutureValue$100+$100(0.05)=$105PV+Interest=FVPV+PV*i=F
5、VPV=PresentValueFV=FutureValuei=interestrate(asapercentage)FutureValueFutureValueinoneyear.FV=PV*(1+i)FutureValueFutureValueintwoyears100(1+0.05)(1+0.05)=$110.25FVattheendofoneyearFutureValueCompoundinterest:interestontheinterestGeneralFormula–Futurevalueofan
6、investmentofPVinnyearsatinterestratei(measuredasadecimal,or5%=0.05)FVn=PV*(1+i)nFutureValueComputingFutureValueat5%AnnualInterestPresentValueAdollarpaidtoyouoneyearfromnowislessvaluablethanadollarpaidtoyoutodayWeneedtofigureouthowmuchapaymentpromisedinthefu
7、tureisworthtoday.Sayyouagreetomakea&225loan,andtheborrowerofferstorepayyoueither$100ayearfor3yearsor$125ayearfor2years.Whichoffershouldyoutake?PresentValuePresentValue(PV)isthevaluetoday(inthepresent)ofapaymentthatispromisedtobemadeinthefuture.ORPresentValuei
8、stheamountthatmustbeinvestedtodayinordertorealizeaspecificamountonagivenfuturedate.PresentValuePresentValueofanamountreceivedinoneyear.SolvingtheFutureValueEquationFV=PV*(1+i)PresentValue