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Recitation 06

Recitation 06. Online Quiz 3 . Due today 5:00 pm Covers Hedge Fund Protection in Bear Markets for the Retail Investor  (page 68) Linking the Pieces Together—and Then Some  (page 71) You are given 9 minutes to complete 9 questions for 9 points.

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Recitation 06

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  1. Recitation 06

  2. Online Quiz 3 • Due today 5:00 pm • Covers • Hedge Fund Protection in Bear Markets for the Retail Investor  (page 68) • Linking the Pieces Together—and Then Some  (page 71) • You are given 9 minutes to complete 9 questions for 9 points. • NOTE: Make sure to save all of your responses prior submitting the quiz.

  3. TVM Quiz 2 • Starts at 8:00 am on Monday, February 18th and is due 5:00pm on Friday, February 22nd • Covers • Annuities • Bond Pricing • 40 minutes to complete 5 problems • Practice Problems are available on course webpage

  4. Online Quiz 4 • Starts at 8:00 am on Monday, February 18thand is due 5:00pm on Friday, February 22th • Covers • The Saga of the Beardstown Ladies: Crooks or Just Naive? • Reverse Repos and the Orange County Fiasco • 18 points for 18 questions and 18 minutes to complete

  5. Midterm • Review session for Midterm Exam will be next week (Feb 22) during recitation • Exam will be held on March 12 th in class • Covers lecture material • TVM portion will be held on Blackboard • Dates will be announced • Look over the material we covered in class and e-mail me your questions, so I discuss them in the recitation.

  6. Bonds • Bonds are another way for companies to raise money • Regular Bonds • Callable Bonds • Zero Coupon Bonds • In a regular bond, you purchase the bond and will subsequently be paid interest and the face value after a set amount of time • It’s like a bank loan only you are the banker • You are lending the company money in return for interest payments

  7. Bond Lingo • Par Value (Face Value) • The amount you receive when the bond matures • Coupon payment • The interest payment you receive while holding the bond • Coupon rate • The rate of interest for the coupon payments • Maturity • Bonds don’t go on forever, eventually they mature, and you are paid the par value

  8. Bond Lingo • Yield (Yield to maturity) • The rate of return anticipated on a bond if it is held until the maturity date. • YTM is considered a long-term bond yield expressed as an annual rate. • The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. • It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short

  9. Bond Pricing • TVM steps for bond pricing: • Calculate the coupon payment • Identify the number of payments and adjusted interest rate • Solve the annuity problem regarding the coupon payments • You also have to shift the par value of the bond (that you receive at maturity) to the present day • Sum annuity and single sum • So you really have a single sum and a separate annuity

  10. Bond Formulas • Bond price today • Discounted value of coupon payments • . • Discounted value of Face Value • .

  11. Bond Example • What is today’s value of a $1,000 face value bond with a 5% coupon payment (interest will be paid semiannually) which has 3 years remaining until maturity? The bond is priced to yield 8%.

  12. Solution 1 2. 3.

  13. Solution Continued 4 5.

  14. Another Bond Example • A bond is priced to yield 12%. What is the coupon rate associated with the bond if it pays semiannual coupon payments, has 10 years to maturity, has a $1,000 face value, and is currently priced at $713.25

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