Milk Price now $3.

39
Number of milk cartons bought 100
Total price (Buying power = 100 cartons)

Amount now in bank $339.00

APR (n=1) = R = Nominal 10% R
Bank amount in 1 year

Milk price in 1 year $3.56

Milk Inflation = 3.56/3.39 -1 = h h
Can you buy 10.00% more (Number of cartons)? 110
How many can you buy today = $372.90/3.56 =
1 Change in Buying Power =

2 Real Rate = r = r = (1+R)/(1+h)-1 =

Real Rate of return is = how much more can we
buy with our money!!!
Change in buying power
 Milk Price now $3.39
Number of milk cartons bought 100
Total price (Buying power = 100 cartons) $339.00

Amount now in bank $339.00

APR (n=1) = R = Nominal 10% R
Bank amount in 1 year $372.90

Milk price in 1 year $3.56

Milk Inflation = 3.56/3.39 -1 = h 5.0147% h
Can you buy 10.00% more (Number of cartons)? 110
How many can you buy today = $372.90/3.56 = 104.7472
1 Change in Buying Power = 0.0474719

2 Real Rate = r = 4.7472% r = (1+R)/(1+h)-1 =

Real Rate of return is = how much more can we
buy with our money!!!
Change in buying power
 Nominal Rate = (Annual Rate, n = 1) 0.12 R
Inflation 0.06 h
3 Change in buying power = Real Rate r

Nominal Rate = (Annual Rate, n = 1) 0.01 R

Inflation 0.015 h
4 Change in buying power = Real Rate r

Nominal Rate = (Annual Rate, n = 1) 0.015 R

Inflation 0.01 h
5 Change in buying power = Real Rate r

Just like the stock market, going up looks bigger than going down (going
down you can only loose 100%, but up can be bigger than 100%)
 Nominal Rate = (Annual Rate, n = 1) 0.12 R
Inflation 0.06 h
3 Change in buying power = Real Rate 0.056603774 r

Nominal Rate = (Annual Rate, n = 1) 0.01 R

Inflation 0.015 h
4 Change in buying power = Real Rate -0.004926108 r

Nominal Rate = (Annual Rate, n = 1) 0.015 R

Inflation 0.01 h
5 Change in buying power = Real Rate 0.00495050 r

Just like the stock market, going up looks bigger than going down (going
down you can only loose 100%, but up can be bigger than 100%)
6 Point of View: Bond Issuer 8 Point of View: Bondholder #1 10
Interest Only - Coupon Bond Interest Only - Coupon Bond
Bond Issue Date 1/1/2010 Day #1 buys bond 1/1/2010
Face Value = FV ($1,000.00) Face Value = FV $1,000.00
i = Coupon Rate 10.00% i = Coupon Rate 10.00%
n 2 n 2
x 3 x 3
i/n i/n
x*n x*n
PMT Coupon PMT PMT
YTM 11.00% YTM 11.00%
YTM/n YTM/n
PV PV
check: check:

7 Point of View: Bond Issuer 9 Point of View: Bondholder #1

Deep Discount - Zero Coupon Bonds Deep Discount - Zero Coupon Bonds
Face Value = FV ($1,000.00) Face Value = FV $1,000.00
i = Coupon Rate 10.00% i = Coupon Rate 10.00%
n 2 n 2
x 3 x 3
i/n 0.00% i/n 0.00%
x*n 0 x*n 0
YTM 11.00% YTM 11.00%
YTM/n 0.00% YTM/n 0.00%
PV PV
check: check:
 Point of View: Bondholder #2 (This
person buys the bond from
Bondholder #1)
Interest Only - Coupon Bond
Day #2 buys bond 1/1/2012
Face Value = FV $1,000.00
i = Coupon Rate 10.00%
n 2
x 1
i/n
x*n
PMT Coupon PMT
YTM 9.00%
YTM/n
PV
check:
6 Point of View: Bond Issuer 8 Point of View: Bondholder #1 10
Interest Only - Coupon Bond Interest Only - Coupon Bond
Bond Issue Date 1/1/2010 Day #1 buys bond 1/1/2010
Face Value = FV ($1,000.00) Face Value = FV $1,000.00
i = Coupon Rate 10.00% i = Coupon Rate 10.00%
n 2 n 2
x 3 x 3
i/n 5.00% i/n 5.00%
x*n 6 x*n 6
PMT Coupon PMT ($50.00) PMT $50.00
YTM 11.00% YTM 11.00%
YTM/n 5.50% YTM/n 5.50%
PV $975.02 PV ($975.02)
check: $975.02 check: ($975.02)

7 Point of View: Bond Issuer 9 Point of View: Bondholder #1

Deep Discount - Zero Coupon Bonds Deep Discount - Zero Coupon Bonds
Face Value = FV ($1,000.00) Face Value = FV $1,000.00
i = Coupon Rate 10.00% i = Coupon Rate 10.00%
n 2 n 2
x 3 x 3
i/n 5.00% i/n 5.00%
x*n 6 x*n 6
YTM 11.00% YTM 11.00%
YTM/n 5.50% YTM/n 5.50%
PV $725.25 PV ($725.25)
check: $725.25 check: ($725.25)
 Point of View: Bondholder #2 (This
person buys the bond from
Bondholder #1)
Interest Only - Coupon Bond
Day #2 buys bond 1/1/2012
Face Value = FV $1,000.00
i = Coupon Rate 10.00%
n 2
x 1
i/n 5.00%
x*n 2
PMT Coupon PMT $50.00
YTM 9.00%
YTM/n 4.50%
PV ($1,009.36)
check: ($1,009.36)
 Point of View: Bondholder #2 (This person
buys the bond from Bondholder #1)
Interest Only - Coupon Bond
Bond Price = PV -1,009.36
FV = Face Value $1,000.00
PMT = Coupon PMT $50.00
Years To Maturity 1
n = assumed to be semi-annual = 2
Total Number of Periods
YTM/n
YTM check
Effective Annual Yield
 Point of View: Bondholder #2 (This person buys the
bond from Bondholder #1)
Interest Only - Coupon Bond
Bond Price = PV -1,009.36
FV = Face Value $1,000.00
PMT = Coupon PMT $50.00
Years To Maturity 1
n = assumed to be semi-annual = 2
Total Number of Periods 2
YTM/n 4.50%
YTM 9.00% check
Effective Annual Yield 9.2025% 0.092025
1 Year 10% Coupon Bond is priced at 100.936%
1 Year 10% Coupon Bond is priced at 100.936%

Years To Maturity 1
n 2
Total Periods 2
Face 1000
Coupon Rate 10%
Interest PMT = Coupon PMT 50
Quoted Price 1.00936
Price = PV -1009.36
YTM/n 4.50%
YTM 0.0900035406
Effective Annual Rate 0.0920286999
 YTM and Price move in
opposite Directions
Point of View = Bond Issuer
Face Value = FV = $1,000.00
Maturity = years = x = 30
n= 2
Coupon Rate = 6.00%
Coupon Rate/n = 3.00%
Semiannual Coupon Payment = $30.00
Total # of Coupon Payments = 60
YTM/n = 3.00%
YTM = 6.00% YTM = Coupon Rate
Bond Price = PV = 1,000.00 Par
 YTM and Price move in
opposite Directions
Point of View = Bond Issuer
Face Value = FV = $1,000.00
Maturity = years = x = 30
n= 2
Coupon Rate = 6.00%
Coupon Rate/n = 3.00%
Semiannual Coupon Payment = $30.00
Total # of Coupon Payments = 60
YTM/n = 1.00%
YTM = 2.00% YTM < Coupon Rate
Bond Price = PV = 1,899.10 Premium

YTM Discount Rate Bond Price Bond Price

0.04 $1,347.61 Bond Price $1,600.00
0.05 $1,154.54 $1,400.00
0.06 $1,000.00
$1,200.00
0.07 $875.28
0.08 $773.77 $1,000.00
0.09 $690.43 $800.00
0.1 $621.41 $600.00
0.11 $563.75
$400.00
0.12 $515.16
0.13 $473.85 $200.00
0.14 $438.43 $0.00
0.15 $407.83 0.02 0.04 0.06 0.08Discount
YTM 0.1Rate 0.12 0.14 0
 Price

0.1Rate
Discount 0.12 0.14 0.16
Years To Maturity 10
n 2
Coupon Rate 6%
Coupon Rate/n 3%
YTM 6%
YTM/n 0.03
Total Periods 20
Coupon PMT -$30.00
Face -$1,000.00
PV = Price
Years To Maturity 10
n 2
Coupon Rate 6%
Coupon Rate/n 3%
YTM 7%
YTM/n 0.035
Total Periods 20
Coupon PMT -$30.00
Face -$1,000.00
PV = Price $928.94 Discount
 YTM (Market) Rate For Similar Securities
6% 8% 10.0%

Coupon Rate On Bond (Used To Calculate Interest PMT)

8% 8% 8.0%

Record Bond At Record Bond Record Bond At

Premium Without Pre. Or Dis. Discount
 Selling Price For Bond
Below 1.00 1.00 Above 1.00
(Example: 93 or (Example: 100 or (Example: 107 or
0.93 or 93%) 1.00 or 100%) 1.07 or 107%)

Record Bond With

Record Bond At No Premium Or Record Bond At
Discount Discount Premium
Years To Maturity 10
n 2
Coupon Rate 6%
Coupon Rate/n 3%
YTM 7%
YTM/n 0.035
Total Periods 20
Coupon PMT -$30.00
Face -$1,000.00
PV = Price $928.94

Period Coupon YTM Interest Principal Addition Carrying Balance YTM

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Years To Maturity 10
n 2
Coupon Rate 6%
Coupon Rate/n 3%
YTM 5%
YTM/n 0.025
Total Periods 20
Coupon PMT -$30.00
Face -$1,000.00
PV = Price $1,077.95

Period Coupon YTM Interest Pricipal Addition Carrying Balance YTM

0 $1,077.95
1 $30.00 $26.95 ($3.05) $1,074.89 0.025
2 $30.00 $26.87 ($3.13) $1,071.77 0.025
3 $30.00 $26.79 ($3.21) $1,068.56 0.025
4 $30.00 $26.71 ($3.29) $1,065.28 0.025
5 $30.00 $26.63 ($3.37) $1,061.91 0.025
6 $30.00 $26.55 ($3.45) $1,058.45 0.025
7 $30.00 $26.46 ($3.54) $1,054.92 0.025
8 $30.00 $26.37 ($3.63) $1,051.29 0.025
9 $30.00 $26.28 ($3.72) $1,047.57 0.025
10 $30.00 $26.19 ($3.81) $1,043.76 0.025
11 $30.00 $26.09 ($3.91) $1,039.85 0.025
12 $30.00 $26.00 ($4.00) $1,035.85 0.025
13 $30.00 $25.90 ($4.10) $1,031.75 0.025
14 $30.00 $25.79 ($4.21) $1,027.54 0.025
15 $30.00 $25.69 ($4.31) $1,023.23 0.025
16 $30.00 $25.58 ($4.42) $1,018.81 0.025
17 $30.00 $25.47 ($4.53) $1,014.28 0.025
18 $30.00 $25.36 ($4.64) $1,009.64 0.025
19 $30.00 $25.24 ($4.76) $1,004.88 0.025
20 $30.00 $25.12 ($4.88) $1,000.00 0.025
Years To Maturity 10 Date Description DR CR
n 2
Coupon Rate 6%
Coupon Rate/n 3%
YTM 7%
YTM/n 0.035
Total Periods 20
Coupon PMT -$30.00
Face -$1,000.00
PV = Price $928.94

YTM Pricipal
Period Coupon Interest Addition Carrying Balance YTM
0 $928.94
1 $30.00 $32.51 $2.51 $931.45 0.035
2 $30.00 $32.60 $2.60 $934.05 0.035
3 $30.00 $32.69 $2.69 $936.74 0.035
4 $30.00 $32.79 $2.79 $939.53 0.035
5 $30.00 $32.88 $2.88 $942.41 0.035
6 $30.00 $32.98 $2.98 $945.40 0.035
7 $30.00 $33.09 $3.09 $948.49 0.035
8 $30.00 $33.20 $3.20 $951.68 0.035
9 $30.00 $33.31 $3.31 $954.99 0.035
10 $30.00 $33.42 $3.42 $958.42 0.035
11 $30.00 $33.54 $3.54 $961.96 0.035
12 $30.00 $33.67 $3.67 $965.63 0.035
13 $30.00 $33.80 $3.80 $969.43 0.035
14 $30.00 $33.93 $3.93 $973.36 0.035
15 $30.00 $34.07 $4.07 $977.42 0.035
16 $30.00 $34.21 $4.21 $981.63 0.035
17 $30.00 $34.36 $4.36 $985.99 0.035
18 $30.00 $34.51 $4.51 $990.50 0.035
19 $30.00 $34.67 $4.67 $995.17 0.035
20 $30.00 $34.83 $4.83 $1,000.00 0.035
Years To Maturity 10 Date Description DR CR
n 2 1/1/2010 Cash $928.94
Coupon Rate 6% Discount On BP $71.06
Coupon Rate/n 3% Bonds Payable $1,000.00
YTM 7%
YTM/n 0.035 7/1/2010 Interest Expense $32.51
Total Periods 20 Cash $30.00
Coupon PMT -$30.00 Discount On BP $2.51
Face -$1,000.00
PV = Price $928.94

YTM Pricipal
Period Coupon Interest Addition Carrying Balance YTM
0 $928.94
1 $30.00 $32.51 $2.51 $931.45 0.035
2 $30.00 $32.60 $2.60 $934.05 0.035
3 $30.00 $32.69 $2.69 $936.74 0.035
4 $30.00 $32.79 $2.79 $939.53 0.035
5 $30.00 $32.88 $2.88 $942.41 0.035
6 $30.00 $32.98 $2.98 $945.40 0.035
7 $30.00 $33.09 $3.09 $948.49 0.035
8 $30.00 $33.20 $3.20 $951.68 0.035
9 $30.00 $33.31 $3.31 $954.99 0.035
10 $30.00 $33.42 $3.42 $958.42 0.035
11 $30.00 $33.54 $3.54 $961.96 0.035
12 $30.00 $33.67 $3.67 $965.63 0.035
13 $30.00 $33.80 $3.80 $969.43 0.035
14 $30.00 $33.93 $3.93 $973.36 0.035
15 $30.00 $34.07 $4.07 $977.42 0.035
16 $30.00 $34.21 $4.21 $981.63 0.035
17 $30.00 $34.36 $4.36 $985.99 0.035
18 $30.00 $34.51 $4.51 $990.50 0.035
19 $30.00 $34.67 $4.67 $995.17 0.035
20 $30.00 $34.83 $4.83 $1,000.00 0.035
DR=CR
Years To Maturity 10 Date Description DR CR
n 2
Coupon Rate 6%
Coupon Rate/n 3%
YTM 5%
YTM/n 0.025
Total Periods 20
Coupon PMT -$30.00
Face -$1,000.00
PV = Price $1,077.95

YTM Pricipal
Period Coupon Interest Addition Carrying Balance YTM
0 $1,077.95
1 $30.00 $26.95 ($3.05) $1,074.89 0.025
2 $30.00 $26.87 ($3.13) $1,071.77 0.025
3 $30.00 $26.79 ($3.21) $1,068.56 0.025
4 $30.00 $26.71 ($3.29) $1,065.28 0.025
5 $30.00 $26.63 ($3.37) $1,061.91 0.025
6 $30.00 $26.55 ($3.45) $1,058.45 0.025
7 $30.00 $26.46 ($3.54) $1,054.92 0.025
8 $30.00 $26.37 ($3.63) $1,051.29 0.025
9 $30.00 $26.28 ($3.72) $1,047.57 0.025
10 $30.00 $26.19 ($3.81) $1,043.76 0.025
11 $30.00 $26.09 ($3.91) $1,039.85 0.025
12 $30.00 $26.00 ($4.00) $1,035.85 0.025
13 $30.00 $25.90 ($4.10) $1,031.75 0.025
14 $30.00 $25.79 ($4.21) $1,027.54 0.025
15 $30.00 $25.69 ($4.31) $1,023.23 0.025
16 $30.00 $25.58 ($4.42) $1,018.81 0.025
17 $30.00 $25.47 ($4.53) $1,014.28 0.025
18 $30.00 $25.36 ($4.64) $1,009.64 0.025
19 $30.00 $25.24 ($4.76) $1,004.88 0.025
20 $30.00 $25.12 ($4.88) $1,000.00 0.025
Years To Maturity 10 Date Description DR CR
n 2 1/1/2010 Cash $1,077.95
Coupon Rate 6% Premium On BP $77.95
Coupon Rate/n 3% Bonds Payable $1,000.00
YTM 5%
YTM/n 0.025 7/1/2010 Interest Expense $26.95
Total Periods 20 Premium On BP $3.05
Coupon PMT -$30.00 Cash $30.00
Face -$1,000.00
PV = Price $1,077.95

YTM Pricipal
Period Coupon Interest Addition Carrying Balance YTM
0 $1,077.95
1 $30.00 $26.95 ($3.05) $1,074.89 0.025
2 $30.00 $26.87 ($3.13) $1,071.77 0.025
3 $30.00 $26.79 ($3.21) $1,068.56 0.025
4 $30.00 $26.71 ($3.29) $1,065.28 0.025
5 $30.00 $26.63 ($3.37) $1,061.91 0.025
6 $30.00 $26.55 ($3.45) $1,058.45 0.025
7 $30.00 $26.46 ($3.54) $1,054.92 0.025
8 $30.00 $26.37 ($3.63) $1,051.29 0.025
9 $30.00 $26.28 ($3.72) $1,047.57 0.025
10 $30.00 $26.19 ($3.81) $1,043.76 0.025
11 $30.00 $26.09 ($3.91) $1,039.85 0.025
12 $30.00 $26.00 ($4.00) $1,035.85 0.025
13 $30.00 $25.90 ($4.10) $1,031.75 0.025
14 $30.00 $25.79 ($4.21) $1,027.54 0.025
15 $30.00 $25.69 ($4.31) $1,023.23 0.025
16 $30.00 $25.58 ($4.42) $1,018.81 0.025
17 $30.00 $25.47 ($4.53) $1,014.28 0.025
18 $30.00 $25.36 ($4.64) $1,009.64 0.025
19 $30.00 $25.24 ($4.76) $1,004.88 0.025
20 $30.00 $25.12 ($4.88) $1,000.00 0.025
Bond Face Value = FV = -$1,000.00
Coupon Payment -$100.00
Coupon Rate = 10.00%
n= 1
1 30
YTM Time To Maturity
years = 1 years = 30
5%
10%
15%
20% The Longer The Maturity, The More YTM Affects Bond Price
ffects Bond Price
Bond Face Value = FV = -$1,000.00
Coupon Payment -$100.00
Coupon Rate = 10.00%
n= 1
1 30
YTM Time To Maturity
years = 1 years = 30
5% $1,047.62 $1,768.62
10% $1,000.00 $1,000.00
15% $956.52 $671.70
20% $916.67 $502.11 The Longer The Maturity, The More YTM Affects Bond Price

The Longer The Maturity, The More YTM Affects Bond Price
$2,000.00
Bond Value

$1,800.00 $1,768.62
$1,600.00
$1,400.00
$1,200.00
$1,047.62 $1,000.00 $956.52
$1,000.00 $1,000.00 $916.67 year
$800.00 year
$671.70 30
$600.00
$502.11
$400.00
$200.00
$0.00
5% 10% YTM 15% 20%
ffects Bond Price

rice

$916.67 years = 1
years =
30
$502.11

20%
Years To Maturity = 10
YTM Rate Start 5.00%
YTM Rate Increment = 5.00%
Bond Face Value = FV = $ 1,000.00
n= 1

The Lower The Coupon Rate, The More YTM Affects Bond Price
Coupon Rate = 0.02 0.05
YTM 2.00% Coupon Rate 5.00% Coupon Rate Difference
5.0% $0.00
15.0% $0.00
20.0% $0.00
25.0% $0.00

Proportionally larger Higher Coupon Payments

FV causes lower PV earlier are less affected by
than Higher Coupon discounting than the Bond
Bond. with a lower coupon rate.
Loss in value from: 0.05 to 0.25
Years To Maturity = 10
YTM Rate Start 5.00%
YTM Rate Increment = 5.00%
Bond Face Value = FV = $ 1,000.00
n= 1

The Lower The Coupon Rate, The More YTM Affects Bond Price
Coupon Rate = 0.02 0.05
YTM 2.00% Coupo5.00% Coupon Rate Difference
5.0% $768.35 $1,000.00 $231.65
15.0% $347.56 $498.12 $150.56
20.0% $245.36 $371.13 $125.77
25.0% $178.78
Proportiona $285.90 $107.12
lly larger FV
causes
lower PV Higher Coupon Payments
than Higher earlier are less affected by
Coupon discounting than the Bond
Bond. with a lower coupon rate.
Loss in value from: 0.05 to -0.7673134 -0.71410065408
 The Lower The Coupon Rate, The More YTM Affects
Bond Price
$1,200.00
Bond Price

$1,000.00

$800.00

$600.00
5.00% Coupon Rate

$400.00 2.00% Coupon Rate

$200.00

$0.00
$768.35 $347.56 $245.36
YTM $178.78
Tax Bracket 25%
Corportae Bond Pays Coupon = 5%
Muni Bond Pays Coupon = 3.90%
After Tax Rate For Muni
After Tax For Corporate
Tax Bracket 25%
Corportae Bond Pays Coupon = 5%
Muni Bond Pays Coupon = 3.90%
After Tax Rate For Muni 3.90%
After Tax For Corporate 0.0375
Point of View = Bondholder's
Face Value = Par Value = $1,000.00
# of Bonds Issued = 1
Total Face Value = FV =
Coupon Rate = 10.00%
# Compounding periods per Year = n = 2
Coupon Rate/n =
Periodic Coupon payments (Interest $ Amount) = PMT =
Years To Maturity = x = 20
Total Number of Periods = n*x =
Discount Rate = Required Yield = i = YTM = 12.00%
YTM/n = check:
Bond Value = Bond Price = PV (using PV function) = <<
Effective Annual Yield = (1+YTM/n)^n -1 = <<
Words:
Point of View = Bondholder's
Face Value = Par Value = $1,000.00
# of Bonds Issued = 1
Total Face Value = FV = $1,000.00
Coupon Rate = 10.00%
# Compounding periods per Year = n = 2
Coupon Rate/n = 5.00%
Periodic Coupon payments (Interest $ Amount) = PMT = $50.00
Years To Maturity = x = 20
Total Number of Periods = n*x = 40
Discount Rate = Required Yield = i = YTM = 12.00%
YTM/n = 0.06 check:
Bond Value = Bond Price = PV (using PV function) = ($849.54) << ($849.54)
Effective Annual Yield = (1+YTM/n)^n -1 = 12.36% << 0.1236
The Bond with a 10.00% coupon is priced to yield 12.00% at $
This Bond is selling at a Discount. Further, the Effective Annua
12.36%.
Words:
riced to yield 12.00% at $849.54.
ther, the Effective Annual Yield is
%.
Point of View = Bondholder's
Face Value = Par Value = $1,000.00
# of Bonds Issued = 1
Total Face Value = FV =
Coupon Rate = 8.00%
# Compounding periods per Year = n = 2
Coupon Rate/n =
Periodic Coupon payments (Interest $ Amount) = PMT =
Years To Maturity = x = 6
Total Number of Periods = n*x =
Discount Rate = Required Yield = i = YTM =
YTM/n =
Bond Value = Bond Price = ($911.37) check:
Effective Annual Yield = (1+YTM/n)^n -1 = 0

Words:
check FV:
$911.37
Point of View = Bondholder's
Face Value = Par Value = $1,000.00
# of Bonds Issued = 1
Total Face Value = FV = $1,000.00
Coupon Rate = 8.00%
# Compounding periods per Year = n = 2
Coupon Rate/n = 4.00%
Periodic Coupon payments (Interest $ Amount) = PMT = $40.00
Years To Maturity = x = 6
Total Number of Periods = n*x = 12
Discount Rate = Required Yield = i = YTM = 0.09999939824
YTM/n = 4.999970%
Bond Value = Bond Price = ($911.37) check:
Effective Annual Yield = (1+YTM/n)^n -1 = 10.25% 0.102499

The Bond with a 8.00% coupon is priced to yield 10.00% at $91

Bond is selling at a Discount. Further, the Effective Annual
10.25%.
Words:
 check FV:
$1,000.00

pon is priced to yield 10.00% at $911.37. This

ount. Further, the Effective Annual Yield is
10.25%.
15 a

15 b
 The Price of a Bond and the YTM are inversely related. If the YTM goes up, the Bond Price goes
down (more interest is taken out during discounting). If the YTM goes down, the Bond Price goes
15 a up (less interest is taken out during discounting).

Bonds that sell at a Premium over Par do so because the Coupon Rate of the Bond is greater than
the YTM (Bondholders are willing to pay more to get a Coupon Rate that is higher than the YTM
(market rate).
Bonds that sell at a Discount compared to Par do so because the Coupon Rate of the Bond is less
than the YTM (Bondholders are only willing to pay less than par because they are getting a Coupon
Rate that is lower than the YTM (market rate).

Coupon Rate > YTM ==> Sell at Premium

Coupon Rate = YTM ==> Sell at Par
15 b Coupon Rate < YTM ==> Sell at Discount
Point of View = Bondholder's
Coupon Rate = 7.00%
Years to Maturity = 20
Bond Face = 1,000.00 made up number
n= 1 made up number
PMT =
YTM when originally issued = 10.00% made up number
YTM today = 15.00%
Price when Issued
Price Today

Words:
Point of View = Bondholder's
Coupon Rate = 7.00%
Years to Maturity = 20
Bond Face = 1,000.00 made up number
n= 1 made up number
PMT = 70.00
YTM when originally issued = 10.00% made up number
YTM today = 15.00%
Price when Issued -744.59
Price Today -499.25
Price and YTM are inversely related. If a 7.00% Coupon Bond is priced at an YTM of 15.00%
that was used to value it when it was first issued, the Price will go down. For example, If th
Words: 10.00% and it is reprice at a YTM of 15.00%, the price would go from $744.
ced at an YTM of 15.00% that is greater than the YTM
down. For example, If the Bond was issued at a YTM of
ce would go from $744.59 to $499.25.
Point of View = Bondholder's
Face Value = Par Value = 1000
# of Bonds Issued = 1
Total Face Value = FV =
Coupon Rate = 7.00%
# Compounding periods per Year = n = 1
Coupon Rate/n =
Periodic Coupon payments (Interest $ Amount) = PMT =
Years To Maturity = x = 8
Total Number of Periods = n*x =
Discount Rate = Required Yield = i = YTM = 9.00%
YTM/n = Check:
Bond Value = Bond Price = PV (using PV function) =
Effective Annual Yield = (1+YTM/n)^n =
Words:
Point of View = Bondholder's
Face Value = Par Value = 1000
# of Bonds Issued = 1
Total Face Value = FV = 1000
Coupon Rate = 7.00%
# Compounding periods per Year = n = 1
Coupon Rate/n = 7.00%
Periodic Coupon payments (Interest $ Amount) = PMT = 70
Years To Maturity = x = 8
Total Number of Periods = n*x = 8
Discount Rate = Required Yield = i = YTM = 9.00%
YTM/n = 0.09 Check:
Bond Value = Bond Price = PV (using PV function) = ($889.30) -889.3036
Effective Annual Yield = (1+YTM/n)^n = 9.00%
The Bond with a 7.00% coupon is priced to yield 9.00% at $889
Bond is selling at a Discount. Further, the Effective Annual Y
9.00%.
Words:
ed to yield 9.00% at $889.30. This
er, the Effective Annual Yield is
%.
Point of View = Bondholder's
Face Value = Par Value = 1000
# of Bonds Issued = 1
Total Face Value = FV =
Coupon Rate = 10.00%
# Compounding periods per Year = n = 1
Coupon Rate/n =
Periodic Coupon payments (Interest $ Amount) = PMT =
Years To Maturity = x = 9
Total Number of Periods = n*x =
Discount Rate = Required Yield = i = YTM =
YTM/n =
Bond Value = Bond Price = ($1,145.70)
Effective Annual Yield = (1+YTM/n)^n =
Effective Annual Yield (Math) = 0.00%

Words:
Point of View = Bondholder's
Face Value = Par Value = 1000
# of Bonds Issued = 1
Total Face Value = FV = 1000
Coupon Rate = 10.00%
# Compounding periods per Year = n = 1
Coupon Rate/n = 10.00%
Periodic Coupon payments (Interest $ Amount) = PMT = 100
Years To Maturity = x = 9
Total Number of Periods = n*x = 9
Discount Rate = Required Yield = i = YTM = 0.07696946763
YTM/n = 7.696947%
Bond Value = Bond Price = ($1,145.70)
Effective Annual Yield = (1+YTM/n)^n = 7.70%
Effective Annual Yield (Math) = 7.70%
The Bond with a 10.00% coupon is priced to yield 7.70% at $1
This Bond is selling at a Premium. Further, the Effective Annua
7.70%.
Words:
 iced to yield 7.70% at $1,145.70.
ther, the Effective Annual Yield is
%.
Point of View = Bond Issuer's
Face Value = Par Value = 1,000.00
# of Bonds Issued = 1
Total Face Value = FV =
Coupon Rate =
# Compounding periods per Year = n = 1
Periodic Coupon payments (Interest $ Amount) = PMT =
Years To Maturity = x = 16
Discount Rate = Required Yield = i = YTM = 7.50%
Type = 0 = 0
Bond Value = Bond Price = PV (using PV function) = 963.00
Point of View = Bond Issuer's
Face Value = Par Value = 1,000.00
# of Bonds Issued = 1
Total Face Value = FV = -1,000.00
Coupon Rate = 0.0709525272
# Compounding periods per Year = n = 1
Periodic Coupon payments (Interest $ Amount) = PMT = -70.95
Years To Maturity = x = 16
Discount Rate = Required Yield = i = YTM = 7.50%
Type = 0 = 0
Bond Value = Bond Price = PV (using PV function) = 963.00
Point of View = Bondholder's
Years to Maturity on Contract = 15
Number of Years ago that Bond Was Issued =1 1
Years Left In Contract = X = 14
Coupon Rate = 6.10%
n= 2
n *x =
Coupon Rate /n =
Periodic Interest PMT = PMT =
Face Value = Par Value = FV = 1,000.00
YTM = 5.30%
YTM/n =
Bond Price =

Words:
Point of View = Bondholder's
Years to Maturity on Contract = 15
Number of Years ago that Bond Was Issued =1 1
Years Left In Contract = X = 14
Coupon Rate = 6.10%
n= 2
n *x = 28
Coupon Rate /n = 0.0305
Periodic Interest PMT = PMT = 30.50
Face Value = Par Value = FV = 1,000.00
YTM = 5.30%
YTM/n = 0.0265
Bond Price = -1,078.37

The 6.10% Coupon Bond is priced to yield

Words: 5.30% at $1,078.37.
Point of View = Bond Issuer's
Years to Maturity on Contract = 15
Number of Years ago that Bond Was Issued =1 2
Years Left In Contract = X =
Coupon Rate = 8.40%
n= 2
n *x =
Coupon Rate /n =
Periodic Interest PMT = PMT =
Face Value = Par Value = FV = -1,000.00
Current Bond Price (% of Par) 108.00%
Current Bond Price =
YTM/n =
YTM = YTM/n*n =

Words:
Point of View = Bond Issuer's
Years to Maturity on Contract = 15
Number of Years ago that Bond Was Issued =1 2
Years Left In Contract = X = 13
Coupon Rate = 8.40%
n= 2
n *x = 26
Coupon Rate /n = 0.042
Periodic Interest PMT = PMT = -42.00
Face Value = Par Value = FV = -1,000.00
Current Bond Price (% of Par) 108.00%
Current Bond Price = 1,080.00
YTM/n = 3.714889256717590000%
YTM = YTM/n*n = 0.074297785134352
The 8.40% Coupon Bond with 13 years
Words: left until maturity has a YTM of 7.43%.
Nominal Rate = R = 5.70%
Inflation Rate = h = 2.90%
Real Rate = r = (1+R)/(1+h)-1 =
Words:

Approximate r = R - h
Nominal Rate = R = 5.70%
Inflation Rate = h = 2.90%
Real Rate = r = (1+R)/(1+h)-1 = 0.027210884353742
The real rate (the percentage
change in buying power) = r =
Words: 2.7211%.

Approximate r = R - h 2.80%
Notice: End/Beg - 1 = Proportional Change =
$1.057/$1.029 - 1
Nominal Rate = R = 13.00%
Inflation Rate = h = (1+R)/(1+r)-1 =
Real Rate = r = 7.00%

Words:
Nominal Rate = R = 13.00%
Inflation Rate = h = (1+R)/(1+r)-1 = 5.6075%
Real Rate = r = 7.00%

If the real rate (the percentage change in

buying power) = r = 7.0000% and the
Nominal Rate is R = .13.0000%, then the
Words: inflation rate = h = 5.6075%.
Nominal Rate = R = 17.00%
Inflation Rate = h = 3.20%
Real Rate = r = (1+R)/(1+h)-1 =

Words:
Nominal Rate = R = 17.00%
Inflation Rate = h = 3.20%
Real Rate = r = (1+R)/(1+h)-1 = 0.133720930232558
Words: The real return = r = 13.3721%.
Point of View Bondholder
1 Bond = Face Value $1,000.00
Coupon Rate 0.075
n 2
Coupon Rate/n
Interest Payment
Clean Price (without accrued interest) = ($915.00)
Months until Interest is Paid 2
Months in 1 period
Partial Interest That belongs to Buyer
Part of Interest that belongs to seller of Bond
Invoice Price
Point of View Bondholder
1 Bond = Face Value $1,000.00
Coupon Rate 0.075
n 2
Coupon Rate/n 0.0375
Interest Payment $37.50
Clean Price (without accrued interest) = ($915.00)
Months until Interest is Paid 2
Months in 1 period 6
Partial Interest That belongs to Buyer $12.50
Part of Interest that belongs to seller of Bond $25.00
Invoice Price ($940.00)
Total Face Value = $45,000,000.00
Years to Maturity = 20
YTM = 0.075
Coupon Rate = 0.075
n= 1
Coupon PMT =
Tax Rate = 0.35
Face Value = $1,000.00
Number Needed =
Price of All Bonds =
20 Year Repayment = Last PMT + FV =
Total Face Value = $45,000,000.00
Years to Maturity = 20
YTM = 0.075
Zero Coupons
n= 1
Zero Coupons
Tax Rate = 0.35
Face Value = $1,000.00
Number Needed =
Price of 1 Bond =
20 Year Repayment = (Face Value)*Number Needed =
Total Face Value = $45,000,000.00 Total Face Value = $45,000,000.00
Years to Maturity = 20 Years to Maturity = 20
YTM = 0.075 YTM = 0.075
Coupon Rate = 0.075
n = Semiannual required by
n= 1 law 2
Coupon PMT = $3,375,000.00 Zero Coupons
Tax Rate = 0.35 Tax Rate = 0.35
Face Value = $1,000.00 Face Value = $1,000.00
Number Needed = $45,000.00 Number Needed = 196,217.04
Price of All Bonds = ($45,000,000.00) Price of 1 Bond = $229.34
20 Year Repayment = Last 20 Year Repayment = (Face
PMT + FV = ($48,375,000.00) Value)*Number Needed = $196,217,044.15

PV $45,000,000.00 PV $45,000,000.00

** Bond Issuer records tax expense (cash flow benefit in) on tax return a
records interest revenue (cash flow disadvantage out) on tax re
Period Interest Balance
0 $45,000,000.00
1 $1,687,500.00 $46,687,500.00
2 $1,750,781.25 $48,438,281.25
3 $1,816,435.55 $50,254,716.80
4 $1,884,551.88 $52,139,268.68
5 $1,955,222.58 $54,094,491.25
6 $2,028,543.42 $56,123,034.67
7 $2,104,613.80 $58,227,648.47
8 $2,183,536.82 $60,411,185.29
9 $2,265,419.45 $62,676,604.74
10 $2,350,372.68 $65,026,977.42
11 $2,438,511.65 $67,465,489.07
12 $2,529,955.84 $69,995,444.91
13 $2,624,829.18 $72,620,274.10
14 $2,723,260.28 $75,343,534.37
15 $2,825,382.54 $78,168,916.91
16 $2,931,334.38 $81,100,251.30
17 $3,041,259.42 $84,141,510.72
18 $3,155,306.65 $87,296,817.37
19 $3,273,630.65 $90,570,448.03
20 $3,396,391.80 $93,966,839.83
21 $3,523,756.49 $97,490,596.32
22 $3,655,897.36 $101,146,493.68
23 $3,792,993.51 $104,939,487.19
24 $3,935,230.77 $108,874,717.96
25 $4,082,801.92 $112,957,519.89
26 $4,235,907.00 $117,193,426.88
27 $4,394,753.51 $121,588,180.39
28 $4,559,556.76 $126,147,737.16
29 $4,730,540.14 $130,878,277.30
30 $4,907,935.40 $135,786,212.70
31 $5,091,982.98 $140,878,195.67
32 $5,282,932.34 $146,161,128.01
33 $5,481,042.30 $151,642,170.31
34 $5,686,581.39 $157,328,751.70
35 $5,899,828.19 $163,228,579.89
36 $6,121,071.75 $169,349,651.63
37 $6,350,611.94 $175,700,263.57
38 $6,588,759.88 $182,289,023.45
39 $6,835,838.38 $189,124,861.83
40 $7,092,182.32 $196,217,044.15
 Book answer shows rounded numbers, but calc
$196,217.04
229.337875281001

flow benefit in) on tax return and bondholder

ow disadvantage out) on tax return.
Cash Flow Benefit to Issuer
$590,625.00
Coupon Bond OUT Cash Flow Year 1:
$2,193,750.00
Zeroes IN Cash Flow In Year 1:
Notice the cash flow for the zeroes is a cash inflow
expense. That is, the company gets to write off the
not have a cash flow for the interest expense. This

$612,773.44 $1,203,398.44 During the life of the bond, the zero generates ca
$635,752.44 debt. We should note an important point here: If y
zero coupon bond, they will be the same. This is be
$659,593.16 $1,295,345.60
$684,327.90
$709,990.20
$736,614.83
$764,237.89
$792,896.81
$822,630.44
$853,479.08
$885,484.54
$918,690.21
$953,141.10
$988,883.89
$1,025,967.03
$1,064,440.80
$1,104,357.33
$1,145,770.73
$1,188,737.13
$1,233,314.77
$1,279,564.08
$1,327,547.73
$1,377,330.77
$1,428,980.67
$1,482,567.45
$1,538,163.73
$1,595,844.87
$1,655,689.05
$1,717,777.39
$1,782,194.04
$1,849,026.32
$1,918,364.81
$1,990,303.49
$2,064,939.87
$2,142,375.11
$2,222,714.18
$2,306,065.96
$2,392,543.43
$2,482,263.81
r shows rounded numbers, but calculation done on un-rounded numbers.
book answer check:
196215.226301561

cash flow for the zeroes is a cash inflow. This is because of the tax deductibility of the imputed interest
hat is, the company gets to write off the interest expense for the year, even though the company did
cash flow for the interest expense. This reduces the company’s tax liability, which is a cash inflow.

life of the bond, the zero generates cash inflows to the firm in the form of the interest tax shield of
hould note an important point here: If you find the PV of the cash flows from the coupon bond and the
n bond, they will be the same. This is because of the much larger repayment amount for the zeroes.