Municipal Bonds. Lecture 20 Section Robb T. Koether. Hampden-Sydney College. Fri, Mar 6, 2015
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1 Lecture 20 Section 10.2 Robb T. Koether Hampden-Sydney College Fri, Mar 6, 2015 Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
2 1 Municipal Bonds 2 Examples 3 Assignment Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
3 Outline 1 Municipal Bonds 2 Examples 3 Assignment Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
4 A municipal bond (or government bond or corporate bond) is issued with a face value, or par value. The face value is the future value of the bond when it is redeemed at maturity. The bond is issued at a given interest rate for a given term. The selling price of the bond is its present value. Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
5 Outline 1 Municipal Bonds 2 Examples 3 Assignment Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
6 A 5-year municipal bond has a par value of $5,000 and an interest rate of 3%. What is its present value? The bond holder decides to sell it after one year. What is a fair price, i.e., the market value? Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
7 A 5-year municipal bond has a par value of $5,000 and an interest rate of 3%. What is its present value? The bond holder decides to sell it after one year. What is a fair price, i.e., the market value? Assume that the current interest rate is still 3%. Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
8 A 5-year municipal bond has a par value of $5,000 and an interest rate of 3%. What is its present value? The bond holder decides to sell it after one year. What is a fair price, i.e., the market value? Assume that the current interest rate is still 3%. What if the current interest rate has risen to 4%. Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
9 A 5-year municipal bond has a par value of $5,000 and an interest rate of 3%. What is its present value? The bond holder decides to sell it after one year. What is a fair price, i.e., the market value? Assume that the current interest rate is still 3%. What if the current interest rate has risen to 4%. What if the current interest rate has dropped to 2%. Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
10 A 5-year municipal bond has a par value of $5,000 and an interest rate of 3%. What is its present value? The bond holder decides to sell it after one year. What is a fair price, i.e., the market value? Assume that the current interest rate is still 3%. What if the current interest rate has risen to 4%. What if the current interest rate has dropped to 2%. Find the interest earned on the original investment if the bondholder sells the bond at the current interest rate (2% or 4%). Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
11 A 5-year municipal bond has a par value of $5,000 and an interest rate of 3%. What is its present value? The bond holder decides to sell it after one year. What is a fair price, i.e., the market value? Assume that the current interest rate is still 3%. What if the current interest rate has risen to 4%. What if the current interest rate has dropped to 2%. Find the interest earned on the original investment if the bondholder sells the bond at the current interest rate (2% or 4%). What rate of return does the investor realize (at 2% or 4%)? Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
12 A 10-year municipal bond has a par value of $1,000. The interest rate on the bond is 3%. Find the selling price of the bond. Suppose that the bondholder wants to sell the bond after one year. If the current interest rate on bonds is still 3%, what is the market value of the bond that he is holding? At that market value, how much does the bondholder gain or lose if he sells the bond? Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
13 In the previous problem, suppose that the current interest had dropped to 1% after one year, when the bondholder wanted to sell the bond. What is the market value of the bond? How much does the bondholder gain or lose if he sells the bond? What rate of interest would the bondholder realize on his investment? Repeat the problem, except assume that the current interest rate has risen to 5%. Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
14 Outline 1 Municipal Bonds 2 Examples 3 Assignment Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
15 Assignment Assignment Chapter 10: Exercises 23, 24, 26, 27. Robb T. Koether (Hampden-Sydney College) Municipal Bonds Fri, Mar 6, / 10
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