Transcription of CHAPTER 33 VALUING BONDS
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CHAPTER 33 VALUING BONDS
1 CHAPTER 33 VALUING BONDSThe value of a bond is the present value of the expected cash flows on the bond,discounted at an interest rate that is appropriate to the riskiness of that bond. Since thecash flows on a straight bond are fixed at issue, the value of a bond is inversely related tothe interest rate that investors demand for that bond. The interest rate charged on a bondis determined by both the general level of interest rates, which applies to all BONDS andfinancial investments, and the default premium specific to the entity issuing the CHAPTER examines the determinants of both the general level of interest rates and themagnitude of the default premia on specific BONDS . The general level of interest ratesincorporates expected inflation and a measure of real return and reflects the termstructure, with BONDS of different maturities carrying different interest rates.
Some special features in bonds such as sinking funds, subordination of further debt and the type of collateral may affect the prices of bonds, as well. ... Even when they do change, as in floating rate bonds, the changes are generally linked to changes in interest rates. Second, bonds usually have fixed lifetimes, unlike
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