Bond Price on an Interest Payment Date参考.ppt

Chapter 15BONDS AND SINKING FUNDS 15.2 Bond Price on an Interest Payment Date * * Dependence of Bond Price On Prevailing Interest Rate P573 Summary: 1. If the coupon rate exceeds the required market rate of return, the bond price will exceed the face value. If the coupon rate is less than the market rate, the bond price will be less than the face value. 2. Bond prices move in a direction opposite to the change in the market rate. If prevailing interest rates decline, bond prices rise. If prevailing interest rates rise, bond prices fall. Calculating A Bond’s Price on an Interest Payment Date F=Face value of the bond b=Coupon rate per interest payment interval (normally 6 months) P=The bond market’s required rate of return per interest payment interval n=Number of interest payments remaining until the maturity date The semiannual interest payment is Fb. | | | | | | | 0 1 2 3 4 n-1 n Fb Fb Fb Fb Fb Fb An +F PV Fair market value of a bond Tip: The bond’s coupon rate is used only to determine the size of the periodic interest payments. The prevailing market rate of return is used to discount the future payments when calculating the bond’s price. Example A $5000 face value bond has a coupon rate of 11% and a maturity date of March 1, 2008. Interest is paid semiannually. On September 1, 1992, the prevailing interest rate on long-term bonds abruptly rose from 8% to 8.25% compounded semiannually. What were the bond’s prices before and after the interest rate change? Solution: F=$5000 b=11%/2=5.5% Interest payment=Fb=$5000×5.5%=$275 From September 1, 1992 to March 1, 2008, there are 15? years remain. n=31 On September 1, 1992, the prevailing market rate rose from p=8%/2=4% to p=8.25%/2=4.125% Bond price= 275 5000 31 4 PMT FV n PV 1/y -63