Podcast
Questions and Answers
What does the coupon represent in a bond?
What does the coupon represent in a bond?
If the price of a bond is less than its face value, how is the bond purchased?
If the price of a bond is less than its face value, how is the bond purchased?
What is the formula to calculate the semi-annual coupon payment?
What is the formula to calculate the semi-annual coupon payment?
What do you use the coupon rate for?
What do you use the coupon rate for?
Signup and view all the answers
What is the market rate used for in bond calculations?
What is the market rate used for in bond calculations?
Signup and view all the answers
In the formula to find the fair price of a bond, what does 'n' represent?
In the formula to find the fair price of a bond, what does 'n' represent?
Signup and view all the answers
How many periods are there for a bond with a maturity of 10 years and semi-annual coupon payments?
How many periods are there for a bond with a maturity of 10 years and semi-annual coupon payments?
Signup and view all the answers
If the face value of a bond is $300,000 and the coupon rate is 10%, what would be the amount of the semi-annual coupon?
If the face value of a bond is $300,000 and the coupon rate is 10%, what would be the amount of the semi-annual coupon?
Signup and view all the answers
Study Notes
Bond Definitions
- Bond: An interest-bearing security promising a stated amount at maturity and regular interest payments (coupons).
Coupon
- Coupon: Periodic interest payments bondholders receive between the purchase and maturity dates, typically semi-annually.
Coupon Rate
- Coupon Rate: The rate per coupon payment period, denoted by 'r'.
Price of a Bond
- Price of a Bond: The bond's purchase price, denoted by 'P'.
Par Value/Face Value
-
Par Value/Face Value: The amount payable at maturity, denoted by 'F'.
- If P = F, the bond is purchased at par.
- If P < F, the bond is purchased at a discount.
- If P > F, the bond is purchased at a premium.
Term of a Bond
- Term of a Bond: The fixed period in years the bond is redeemable, as specified in the certificate. This is the number of years from purchase to maturity.
Fair Price of a Bond
- Fair Price of a Bond: The present value of all cash inflows to the bondholder.
Example Calculations
-
Example 1 (Semi-annual Coupon):
- Face Value (F) = ₱300,000
- Coupon rate (r) = 10%
- Semi-annual coupon amount = F * (1/2) = ₱15,000
-
Example 2 (Fair Price):
- Face Value (F) = ₱100,000
- Maturity date = 10 years from now
- Coupon rate = 5% payable semi-annually
- Annual market rate = 4%
- Calculate the fair price using present value formulas.
Formulas
- Semi-annual Coupon: (Face Value)(1/2)
- Annual Coupon: (Face Value)(r)
-
Fair Price:
- First: P = F / (1 + j)n
- Second: (1 + r)1 = (1 + j)m
- Final: P = R * [1 – (1 + j)-n] / j
Additional Note
- The coupon rate is used to calculate the coupon amount, typically semi-annually, but not the rate at which money grows. Current market conditions affect the present value of future payments, not the coupon rate.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
