《L4_bond_valuation》.pdf

Corporate Finance Lecture 4: Bond Valuation Dr. Zhang March 2010 What we learned last time  Present values and future values  The rationale of discounting cash flows.  Stated interest rate v.s. effective interest rate.  Formulas and applications  Irregular cash flows.  Mortgages  Auto loans  Saving for education or retirement 2010-3-15 2 More on compounding  Continuous compounding: what if the compounding period becomes infinitesimal?  r = stated annual rate.  Effective annual rate is 4  (1+r/4) – 1, if compounding period = quarter;  (1+r/12)12 – 1, if compounding period = month;  (1+r/365)365 – 1, if compounding period = day; n  Lim (1+r/n) – 1 = exp(r) as n→∞, which means that there are infinite compounding periods in one year, i.e. the compounding period is infinitesimal (approaching 0). 2010-3-15 3 More on 等本息and 等本金  They are two different payment schedules.  等额本息(equal payments): each payment is identical throughout the overall payment period.  等额本金(equal principal): the principal part in each payment is equal.  Example: Consider a 12-month loan of ￥4000. APR=7.2%. Make detailed payment schedules for Plan A (等本息) and Plan B (等本金). See the excel file. 2010-3-15 4 More on deferred taxes  Resulting from temporary differences between book (accounting) value of assets and liabilities and their tax value.  Deferred tax liabilities are provided in order that investors may understand the future tax liabilities that may arise as a result of ac