CHAPTER 8
Bonds and Their Valuation
0 1 2 n
k ...
Value CF1 CF2 CFn
ki = k* + IP + LP + MRP + DRP.
kd = 10%. M
1,000
837
kd = 13%.
775
30 25 20 15 10 5 0
Years remaining to Maturity
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8 - 15
Find kd
INT ... + INT M
VB = 1 + +
(1 + k d ) (1 + k d ) (1 + k d )
N N
90 90 1,000
887 = 1 + ... + 10 +
(1 + k d ) (1+ k d ) (1 + k d )
10
Definitions
Change in price
Capital gains yield = .
Beginning price
$90
Current yield = $887
= 0.1015 = 10.15%.
Value
10-year
1,500
.
1,000
. . . 1-year
.
500
0 kd
0% 5% 10% 15%
Semiannual Bonds
Financial performance
Debt ratio
TIE ratio
Current ratio
Other factors
Earnings stability
Regulatory environment
Potential product liability
Accounting policies
Bankruptcy