BOND VALUATION
         The value of any debt claim is equal 
         to the sum of the discounted future 
         cash flows. The discount [interest] 
         for future cash flows is a function 
         of the level of riskiness for a 
         particular bond and is termed the 
         Yield to Maturity (YTM). 
     Bond valuation model; 
        1. V  = Coupon * PVIFA + Face Value * 
              b
            PVIF
     All Rights Reserved      Dr David P Echevarria               2
              BOND VALUATION
     A. Valuation of Bonds with Annual, Semi-
         annual, or quarterly Payments 
        1. Two cash streams are expect for each bond
           a. Coupons
           b. Face or maturity value
        2. Coupons valued like an annuity 
        3. Face Value a single discounted future cash 
            flow
     B. Methods for computing Bond Market 
         Values
        1. Bond Tables
        2. Financial Calculators (preferred)
     All Rights Reserved     Dr David P Echevarria              3
       USING FINANCIAL 
   CALCULATORS TO COMPUTE 
         BOND VALUES 
    A bond pays a coupon of $120 per year, paid 
    semi-annually. The bond matures in 20 years 
    and has a face value of $1,000. If the current 
    YTM rates are 9 percent, how much should this 
    bond sell for? 
    1. ENTER 20 [2nd] [N], [N]: Display: N =      
      40.00
    2. ENTER 9 [I/Y]: Display: I/Y =      9.00
    3. ENTER 60 [PMT]: Display: PMT =       60.00
    4. ENTER 1000 [FV]: Display: FV =      1,000.00
    5. PRESS [CPT] [PV]: Display: PV =     
      -1,276.02
             USING FINANCIAL 
     CALCULATORS TO COMPUTE 
                BOND VALUES
    A. What If Examples
      1. Suppose the YTM is 11 percent; "I/Y" 
          = 11. Enter 11, press [I/Y], then 
          [CPT] , then [PV];    -1,080.23.
      2. If the YTM is 12%; enter 12, press 
          [I/Y], then [CPT], [PV]; PV = 1,000.00 
          or $1,000.00. 
      3. If the YTM is 15%, the price [PV] is 
          $811.08.
       Note as YTM increases, V  decreases
                                     B
                           Yield to First Call
            A. Callable Bonds Pay Premiums
                   1. The premium results in a Yield-to-
                           First-Call different from the Coupon 
                           Rate.
                   2. Calling a 30-year bond 5% coupon 
                           bond four years after issuance @ 
                           107.50.
                   3. N = 4
                   4. PV = -1000
                   5. PMT = 50
         Dr. David P. Echevarria                          All Rights Reserved                                           Slide 6
                   6. FV = 1075.00
                   7. CPT I/Y = 6.70%