EKF201 Lecture 3

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• PV FV/(1 + R)^t
• level coupon bonds the coupon is payed annually or every 6 months and has a face value at the end of the bonds life
• pure discount bond it promises a single payment at a fixed future date
• consols a bond that never stops paying a coupon, no maturity date
• dividends a distribution of cash or stock to a class of shareholders in a company, paid at the end of the year
• growth (g) retention ratio * return on retained earnings
• Par bonds The coupons compensate bond investors for exactly what the market is asking. The coupon rate = market interest rate
• Premium bonds The bonds are over-compensating investors at a rate that is higher than the market rate of interest. The price today is higher than the price in one year. coupon rate > YTM
• Discount bonds The coupons are not compensating the investor enough compared with the market interest rate. The price today is lower than the price in one year. coupon rate < YTM
• YTM The discount rate that makes the present value (PV) of a bond's payment equal to its price
• you discount a future cash flow to... get the present value
• you compound an earlier cash flow to... get the present value
• value of a level coupon bond PV = C * Atr + (FV/(1+R^t))
• coupon = YTM same price today as in one year
• Coupon > YTM lower price in one year than the price today
• Coupon < YTM higher price in one year than the price today

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