Interest rates and bond Valuation
CHAPTER
6
INTEREST RATES AND
BOND VALUATION
L E A R N I N G
LG1
Describe interest rate fundamentals, the term structure of interest rates, and risk premiums.
LG2
Review the legal aspects of bond financing and bond cost.
LG3
LG4
Discuss the general features, quotations, ratings, popular types, and international issues of corporate bonds.
LG5
LG6
G O A L S
Apply the basic valuation model to bonds and describe the impact of required return and time to maturity on bond values.
Explain yield to maturity (YTM), its calculation, and the procedure used to value bonds that pay interest semiannually.
Understand the key inputs and basic model used in the valuation process.
Across the Disciplines WHY THIS CHAPTER MATTERS TO YO U
Accounting: You need to understand interest rates and the various types of bonds in order to be able to account properly for amortization of bond premiums and discounts and for bond purchases and retirements.
Marketing: You need to understand how the interest rate level and the firm’s ability to issue bonds may affect the availability of financing for marketing research projects and new-product development. Information systems: You need to understand the data that you will need to track in bond amortization schedules and bond valuation. Operations: You need to understand how the interest rate level may affect the firm’s ability to raise funds to maintain and increase the firm’s production capacity.
Management: You need to understand the behavior of interest rates and how they will affect the types of funds the firm can raise and the timing and cost of bond issues and retirements.
262
FORD
FORD CRUISES
THE DEBT MARKETS ord and Ford Motor Credit Co. (FMCC), its finance unit, were frequent visitors to the corporate debt markets in 2001, selling over $22 billion in long-term notes and bonds. Despite the problems in the auto industry, investors nervous about stock
6
INTEREST RATES AND
BOND VALUATION
L E A R N I N G
LG1
Describe interest rate fundamentals, the term structure of interest rates, and risk premiums.
LG2
Review the legal aspects of bond financing and bond cost.
LG3
LG4
Discuss the general features, quotations, ratings, popular types, and international issues of corporate bonds.
LG5
LG6
G O A L S
Apply the basic valuation model to bonds and describe the impact of required return and time to maturity on bond values.
Explain yield to maturity (YTM), its calculation, and the procedure used to value bonds that pay interest semiannually.
Understand the key inputs and basic model used in the valuation process.
Across the Disciplines WHY THIS CHAPTER MATTERS TO YO U
Accounting: You need to understand interest rates and the various types of bonds in order to be able to account properly for amortization of bond premiums and discounts and for bond purchases and retirements.
Marketing: You need to understand how the interest rate level and the firm’s ability to issue bonds may affect the availability of financing for marketing research projects and new-product development. Information systems: You need to understand the data that you will need to track in bond amortization schedules and bond valuation. Operations: You need to understand how the interest rate level may affect the firm’s ability to raise funds to maintain and increase the firm’s production capacity.
Management: You need to understand the behavior of interest rates and how they will affect the types of funds the firm can raise and the timing and cost of bond issues and retirements.
262
FORD
FORD CRUISES
THE DEBT MARKETS ord and Ford Motor Credit Co. (FMCC), its finance unit, were frequent visitors to the corporate debt markets in 2001, selling over $22 billion in long-term notes and bonds. Despite the problems in the auto industry, investors nervous about stock