Kenneth R. Szulczyk

     

625

0.08

50

1 1 2 1 3

=$

$

PV =

i

FV

+ =

+i

FV

+

+i

FV

+

+i

FV

PV =

0

0 

( 5 )

We list several bonds with different characteristics below:

 Registered Bonds: Corporation registers the names and addresses of the bondholders. Most

corporations register bonds because the registration protects the investors from loss or theft

of the bonds.

 Bearer Bonds: Who possesses these bonds receive the interest payment. Coupon bonds are

usually bearer bonds.

 Debenture Bonds are unsecured bonds. Thus, the corporation does not pledge assets for

the bond issues. A corporation must be financially strong to issue these bonds because

these bonds rely on the corporation’s credit standing.

 Convertible Bonds: Bondholders have the right to exchange the corporate bonds into

corporate stock on a specified date.

 Municipal Bonds: City and county governments issue municipal bonds to finance local

projects. These bonds are popular with investors because the U.S. government does not tax

their interest earnings. Consequently, municipal bonds usually pay lower interest rates than

other bonds.

Yield to Maturity and Rate of Return

Investors who purchased a financial security know the face value, the maturity date, number
of interest payments per year, and the amount of interest payments. However, investors do not
know the discount rate. They can substitute the information into the present value formula and
solve for the discount rate. Then investors can calculate the discount rate for several different
bonds and select the bond that has the highest discount rate.
If investors hold the bond until maturity, then we call the discount rate the yield to
maturity. Economists consider yield to maturity the most accurate measure of the interest rates
because the yield to maturity allows investors to compare different bonds. For example, you
want to buy a coupon bond today for a market price of $1,600. Bond pays $400 interest per year
and matures in three years. Finally, the bond pays $1,000 on the maturity date. Consequently,
we calculate your yield to maturity of 14.11% in Equation 6. You can compare this yield to
other investments and choose the investment with the greatest yield.