Submitted by: Submitted by infoja
Views: 370
Words: 2182
Pages: 9
Category: Business and Industry
Date Submitted: 04/09/2012 07:46 PM
BOND VALUATION AND YIELD
In valuing a bond ( or any such security ) we are primarily concerned with discounting ( or capitalizing ) the cash flow stream that the investor would receive over the life of the instrument.
The discount ( capitalisation ) rate applied to the cash flow stream will differ among bonds depending on the risk structure of the bond issue.
Future Value and Present Value of an Annuity ( REVISION)
1.Ordinary Annuities.
If $10,000 is deposited each year in a savings account paying 15% p.a., how much will you have after 3 years?
We know : n
FVAn = PMT ∑ ( 1 + i )ⁿ-t
t=1
A simplification of the approach is to find the future value interest factor for an ordinary annuity, when interest is compounded annually at i percent for n periods, using tables or a calculator.
FVAn = PMT ( FVIFA i,n )
FVAn = PMT ( 3.4725 )
= $10,000 ( 3.4725 )
= $ 34, 725
=======
COMPOUNDING MORE THAN ONCE PER YEAR
Interest is paid on many financial instruments more than once per year, often semi- annually ( twice per year). If you deposit $100 in a savings account that compounds interest semi- annually, with a nominal interest rate of 8 % pa the future value after 6
Months would be :
FV 0.05 = PMT ( 1 + [ i ] )
-------------
m
where m= the number of times interest is paid per year.
FV 0.05 = 100 ( 1 + [ 0.08 ] = $104
2
i.e. 4 % interest after 6 months.
At the end of 1 year the...