Key Features of a Bond

1534 Words Jul 31st, 2010 7 Pages
A. What are the key features of a bond?

answer: if possible, begin this lecture by showing students an actual bond certificate. We show a real coupon bond with physical coupons. These can no longer be issued--it is too easy to evade taxes, especially estate taxes, with bearer bonds. All bonds today must be registered, and registered bonds don't have physical coupons.

1. Par or face value. We generally assume a $1,000 par value, but par can be anything, and often $5,000 or more is used. With registered bonds, which is what are issued today, if you bought $50,000 worth, that amount would appear on the certificate.

2. Coupon rate. The dollar coupon is the "rent" on the money borrowed, which is generally the par value of the
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. . 38.55 385.54 1,000.00

Expressed as an equation, we have:


vb = $100(pvifa10%,10) + $1,000(pvif10%,10) = $100 ((1- 1/(1+.1)10)/0.10) + $1,000 (1/(1+0.10)10).

The bond consists of a 10-year, 10% annuity of $100 per year plus a $1,000 lump sum payment at t = 10:

pv annuity = $ 614.46 pv maturity value = 385.54 value of bond = $1,000.00

The mathematics of bond valuation is programmed into financial calculators which do the operation in one step, so the easy way to solve bond valuation problems is with a financial calculator. Input n = 10, kd = i = 10, pmt = 100, and fv = 1000, and then press pv to find the bond's value, $1,000. Then change n from 10 to 1 and press pv to get the value of the 1-year bond, which is also $1,000.
K. Suppose a 10-year, 10 percent, semiannual coupon bond with a par value of $1,000 is currently selling for $1,135.90, producing a nominal yield to maturity of 8 percent. However, the bond can be called after 5 years for a price of $1,050.

K. 1. What is the bond's nominal yield to call (ytc)?

Answer: if the bond were called, bondholders would receive $1,050