University:
University of Houston
Course:
MATH 1313 | Linear Algebra
Academic year:

2022
Views:

303

Pages:

8
Author:

Braelyn Harmon

Chapter 8 Valuing Bonds 14. The expected return of a corporate bond, which is the firm's debt cost of capital, equals the risk- free rate of interest plus a risk premium. The expected return is less than the band's yield to matu- rity because the yield to maruriry of a bond is calculated using the promised cash flows, not the expected cash flows. 15. Bond ratings summarize the creditworthiness of bonds for investors. 16. The difference berween yields on Treasury securities and yields on corporate bonds is called the credit spread or default spread. The credit spread compensates investors for the difference berween promised and expected cash flows and for the risk of default. KEY TERMS bond certificate p. 218 clean price p. 227 corporate bonds p. 233 coupon bonds p. 221 coupon-paying yield curve p. 232 coupon rate p. 218 coupons p. 218 credit risk p. 233 default (credit) spread p. 237 dirty price p. 227 discount p. 218 duration p. 227 face value p. 218 high-yield bonds p. 237 investment-grade bonds p. 237 invoice price p. 227 URTHER EADING junk bonds p. 237 maturity date p. 218 on-the-run bond p. 232 par p. 223 premium p. 223. pure discount bond p. 218 speculative bonds p. 237 spot interest rates p. 220 term p. 218 Treasury bills p. 218 Treasury bonds. 221 Treasury notes p. 221 yield to maturity (YTM) p. 219 zero-coupon hond p. 218 zero-coupon yield curve p. 221 For readers interested in more details about the bond market, the following texts will prove useful: Z. Bodie. A. Kane, and A. Marcus, Investments (McGraw-Hill/Irwin, 2004): F. Fabozzi, The Handbook of Fixed Income Securities (McGraw-Hill, 2005), W. Sharpe, G. Alexander, and J. Bailey, Investments (Prentice-Hall, 1998); and B. Tuckman, Fixed Income Securities: Tools for Today'ı Marken (John Wiley & Sons, Inc., 2002). ROBLEMS Problems in this chapter are available in An averick (") indicates problems with a higher Ievel of difficulty Bond Cash Flows, Prices, and Yields 1. A 30-year bond with a face value of $1000 has a coupon rate of 5.5%, with semiannual pay ments a. What is the coupon payment for this bond? b. Draw the cash flows for the bond on a timeline.