FIN 3303 1st Edition Lecture 8 Outline of Last Lecture II Interest Rate III Example Problems IV Bonds V Example Problems Outline of Current Lecture VI Price Risk and Interest Rate Risk a Examples VII Callable Bond Current Lecture I II III Price risk or Interest rate risk a Coupon rate is 10 b YTM is 10 i 5 years 1 N 5 I Y 10 PV 1000 PMT 100 FV 1000 ii 20 years 1 N 20 I Y 10 PV 1000 PMT 100 FV 1000 c When Price Par Value then YTM Coupon Rate i 5 Years 1 N 5 I Y 15 PV 832 PMT 100 FV 1000 ii 20 Years 1 N 20 I Y 15 PV 687 PMT 100 FV 1000 d Inverse relationship between bond prices and yields e The longer the maturity the greater the change all else being equal Examples a 6 years ago the Singleton company issued 20 year bonds with a 14 annual coupon rate at their 1000 par value The bonds had a 9 call premium with 5 years of call protection Today Singleton called the bonds Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called i N 6 I Y 15 02 PV 1000 PMT 140 FV 1090 Callable Bond a Company does not have to wait until maturity b Cannot refuse These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute