# Essay on Finance Chapter 6

6903 Words Nov 26th, 2013 28 Pages
Chapter 6
Bonds and their Valuation

OVERVIEW

This chapter presents a discussion of the key characteristics of bonds, and then uses time value of money concepts to determine bond values. Bonds are one of the most important types of securities to investors, and are a major source of financing for corporations and governments. The value of any financial asset is the present value of the cash flows expected from that asset. Therefore, once the cash flows have been estimated, and a discount rate determined, the value of the financial asset can be calculated. A bond is valued as the present value of the stream of interest payments (an annuity) plus the present value of the par value, which is the principal amount for the
■ Municipal bonds are issued by state and local governments. The interest earned on most municipal bonds is exempt from federal taxes and state taxes if the holder is a resident of the issuing state.

■ Foreign bonds are issued by foreign governments or foreign corporations. These bonds are not only exposed to default risk, but are also exposed to an additional risk if the bonds are denominated in a currency other than that of the investor’s home currency.

Differences in contractual provisions, and in the underlying strength of the companies backing the bonds, lead to major differences in bonds’ risks, prices, and expected returns. It is important to understand both the key characteristics, which are common to all bonds, and how differences in these characteristics affect the values and risks of individual bonds.

■ The par value is the stated face value of a bond, usually \$1,000. This is the amount of money that the firm borrows and promises to repay on the maturity date.

■ The coupon interest payment is the dollar amount that is paid annually to a bondholder by the issuer for use of the \$1,000 loan. This payment is a fixed amount, established at the time the bond is issued. The coupon interest rate is obtained by dividing the coupon payment by the par value of the bond. ❑ In some cases, a bond’s coupon payment may vary over time. These bonds are called floating rate, or indexed, bonds. Floating rate debt

## Related Documents

• ###### Essay on Chapter 6 Hoyle 12ed

Chapter 6 Variable interest entities, Intra-entity Debt, Consolidated Cash flows, and Other Issues Chapter Outline I. Variable interest entities (VIEs) A. VIEs typically take the form of a trust, partnership, joint venture, or corporation. In most cases a sponsoring firm creates these entities to engage in a limited and well-defined set of business activities. For example, a business may create a VIE to finance the acquisition of a large asset. The VIE purchases the asset using…

Words: 13931 - Pages: 56
• ###### Essay Chapter 6 : Summary And Conclusion

CHAPTER 6 – SUMMARY AND CONCLUSION 6.1 SUMMARY & CONCLUSION In her quest to tackle the issue of poverty in Ghana, and further build upon her achievement of being the first country in the West African sub region to meet MDG 1, the Government of Ghana has rolled out a number of social interventions and policies aimed at alleviating poverty. As part of its measures, the Government in 2007…

Words: 1342 - Pages: 6
• ###### Psy 110 Wk 7 Quiz 6 Chapter 6 Essay

PSY 110 WK 7 QUIZ 6 CHAPTER 6 To purchase this visit here: http://www.activitymode.com/product/psy-110-wk-7-quiz-6-chapter-6/ Contact us at: SUPPORT@ACTIVITYMODE.COM PSY 110 WK 7 QUIZ 6 CHAPTER 6 PSY 110 WK 7 Quiz 6 Chapter 6 Match the letter with the correct definition. a. An individual difference measure of people's likelihood to evaluate objects b. An uncomfortable feeling that incites the need to decrease it c. An estimate of the probability that something is true d. The degree…

Words: 1207 - Pages: 5
• ###### Essay Chapter 6 International Parity Relationships

CHAPTER 6 INTERNATIONAL PARITY RELATIONSHIPS AND FORECASTING FOREIGN EXCHANGE RATES ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS PROBLEMS 1. Suppose that the treasurer of IBM has an extra cash reserve of \$100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of…

Words: 1653 - Pages: 7
• ###### Essay Chapter 6 Of The Nicomachean Ethics

Aristotle defines many virtues in his book, Nicomachean Ethics. A virtue, as defined by Book II Chapter 6 of the Nicomachean Ethics, is a state of being where one acts in the mean, acting in moderation, relative to two vices, two extremes, and within reason according to the prudent person (Aristotle 1107a1). One virtue that he speaks to is the virtue of temperance. In the given scenario, Jerry does not practice temperance, but he is incontinent, lacking self-control, because he lies to his boss,…

Words: 827 - Pages: 4
• ###### Essay Chapter 6 Of Give Me Liberty ! By Foner

In chapter 6 of Give Me Liberty! By Foner they discuss how women were starting to work toward their independence. More and more started doing things to maybe get recognized. Like looking for a “Treasuress” or participating in political discussions about independence. They mention a girl named Ann Carson who was married at age 16 because of her father and not love. She later on left her husband because he did not treat her how she should have been treated. She was human after all like him, they…

Words: 775 - Pages: 4
• ###### Essay on Finance Mini Case Chapter 1

Chapter 1 ------------------------------------------------- An Overview of Corporate Finance and ------------------------------------------------- The Financial Environment MINI CASE ------------------------------------------------- Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Dellatorre, a…

Words: 3524 - Pages: 15
• ###### Essay Solutions for Mcdonald Chapter 6

Chapter 6 Commodity Forwards and Futures Question 6.1. The spot price of a widget is \$70.00. With a continuously compounded annual risk-free rate of 5%, we can calculate the annualized lease rates according to the formula: F0,T = S0 × e(r−δl )×T ⇔ F0,T S0 = e(r−δl )×T S0 = (r − δl ) × T F0,T 1 ln T S0 ⇔ ln F0,T ⇔ δl = r − Time to expiration Forward price Annualized lease rate 3 months \$70.70 0.0101987 6 months \$71.41 0.0101147 9 months \$72.13 0.0100336 12 months \$72.86 0.0099555 The…

Words: 2816 - Pages: 12
• ###### Chapter 6 - Foreign Currency Essay example

01/09/2013 International Accounting, 7/e Frederick D.S. Choi Gary K. Meek Chapter 6: Foreign Currency Ch 6 F i C Translation 1 Learning Objectives        Why do firms translate from one currency to another? What is the difference between a spot forward and swap spot, forward, transaction? What exchange rates are used in the currency translation process and what are their financial statement effects? How does a translation gain or loss differ from a transactions gain or loss?…

Words: 1762 - Pages: 8
• ###### Essay Chapter 6 solutions

Programming Logic and Design, 6e Solutions 6-1 Programming Logic and Design, 6th Edition Chapter 6 Exercises 1. a. Design the logic for a program that allows a user to enter 10 numbers, then displays them in the reverse order of their entry. Answer: A sample solution follows Flowchart: Pseudocode: start Declarations num index num SIZE = 10 num numbers[SIZE] = 0,0,0,0,0,0,0,0,0,0 getReady() Programming Logic and Design, 6e Solutions 6-2 while index < SIZE getNumbers()…

Words: 4152 - Pages: 17