Bonds pay fixed coupon (interest) payments at fixed intervals (usually every six months) and pay the par value at maturity. Par value = $1,000
Coupon = 6.5% or par value per year,
or $65 per year ($32.50 every six months).
Maturity = 28 years (matures in 2032).
Issued by AT&T.
Types of Bonds
Debentures - unsecured bonds.
Subordinated debentures - unsecured “junior” debt.
Mortgage bonds - secured bonds.
Zeros - bonds that pay only par value at maturity; no coupons. Junk bonds - speculative or below-investment grade bonds; rated BB and below. High-yield bonds. Eurobonds - bonds denominated in one currency and sold in another country. (Borrowing overseas). example - suppose Disney decides to sell $1,000 bonds in France. These are U.S. denominated bonds trading in a foreign country. Why do this? If borrowing rates are lower in France.
To avoid SEC regulations.
The Bond Indenture
The bond contract between the firm and the trustee representing the bondholders. Lists all of the bond’s features:
coupon, par value, maturity, etc.
Lists restrictive provisions which are designed to protect bondholders. Describes repayment provisions.
Book value: value of an asset as shown on a firm’s balance sheet; historical cost. Liquidation value: amount that could be received if an asset were sold individually. Market value: observed value of an asset in the marketplace; determined by supply and demand. Intrinsic value: economic or fair value of an asset; the present value of the asset’s expected future cash flows. SECURITY VALUATION
In general, the intrinsic value of an asset = the present value of the stream of expected cash flows discounted at an appropriate required rate of return. Can the intrinsic value of an asset differ from its market value?
Ct = cash flow to be received at time t.
k = the investor’s required rate of return.
V = the intrinsic value of the asset.
Discount the bond’s cash flows at the investor’s...
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