CHAPTER 7Valuation Models

11/16/97

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Table of Contents

CHAPTER 7Valuation Models

Two Ways to Solve

Value of 10% coupon bond over time:

What is “yield to maturity”?

What is the YTM on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887?

Find YTM if price were $1,134.20.

Find current yield and capital gains yield for a 9%, 10-year bond when the bond sells for $887 and YTM = 10.91%.

What is reinvestment rate risk?

Semiannual Bonds

You could buy, for $1,000, either a 10%, 10-year, annual payment bond or an equally risky 10%, 10-year semiannual bond. Which would you prefer?

If $1,000 is the proper price for the semiannual bond, what is the proper price for the annual payment bond?

If you bought this bond, would you be more likely to earn YTM or YTC?

Subnormal or Supernormal Growth

Author: Vickie Bajtelsmit