hey there, not understanding why YTM = discount rate. in the previous video, we saw bond pricing dependent on market interest rate. is the annuity formula here saying that the bond offers 8% APR/coupon but the interest rate/market rate is actually 10%? in which case, why is holding this particular bond held til maturity going to equal the same value as buying a new bond from the market today?
Yes, this is saying that coupon (APR) is 8% but market rate (ie the rate bond investors are requiring) is 10%. That is why the value of this bond is less than its face value. I’m not sure I fully understand what you mean by “why is holding this bond till maturity equal to the same value as buying a new bond”. New bonds will likely be issued with a 10% coupon, which is what investors require. So it will have a value of $1,000. By investing in our bond that is only offering 8% coupon , investors will make some money in coupon payments and the remainder in the form of increase in bond price over time.
Hello Professor Ikram, if you to the following using the first example it won't work and I can' t figure out why. I know the answer by summing the present value of the principle and the present value of the interest. The answer is $5,218,801 but I am really bothered as to why the first function (PV) works on your example and not for this example unless you do it once for the principle and another time for the interest. You got the answer with just one prompt. Any thoughts would be appreciated. Thank you for all that you do! The question: Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2018 on January 1, 2018. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
For bonds paying semi annually, can we consider the discount rate as 10% and coupon rate as 80 while considering the maturity as 7 years? will that make any difference while calculating.
Just know that i will pass my course in senior year because of you. Thank you so much
hey there, not understanding why YTM = discount rate. in the previous video, we saw bond pricing dependent on market interest rate. is the annuity formula here saying that the bond offers 8% APR/coupon but the interest rate/market rate is actually 10%? in which case, why is holding this particular bond held til maturity going to equal the same value as buying a new bond from the market today?
Yes, this is saying that coupon (APR) is 8% but market rate (ie the rate bond investors are requiring) is 10%. That is why the value of this bond is less than its face value.
I’m not sure I fully understand what you mean by “why is holding this bond till maturity equal to the same value as buying a new bond”. New bonds will likely be issued with a 10% coupon, which is what investors require. So it will have a value of $1,000. By investing in our bond that is only offering 8% coupon , investors will make some money in coupon payments and the remainder in the form of increase in bond price over time.
Hello Professor Ikram, if you to the following using the first example it won't work and I can' t figure out why. I know the answer by summing the present value of the principle and the present value of the interest. The answer is $5,218,801 but I am really bothered as to why the first function (PV) works on your example and not for this example unless you do it once for the principle and another time for the interest. You got the answer with just one prompt. Any thoughts would be appreciated. Thank you for all that you do!
The question:
Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2018 on January 1, 2018. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
For bonds paying semi annually, can we consider the discount rate as 10% and coupon rate as 80 while considering the maturity as 7 years? will that make any difference while calculating.
Thanks sir for the knowledge shared!
Thanks