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Bond Valuation【Deric Business Class】 - YouTube
Channel: unknown
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hey guys welcome to derek business class
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in this video I'm gonna show you how to
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do bond valuation when we say valuation
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it means we are calculating the price or
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value of an investment look at the model
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or a formula to calculate the price or
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the value of the bond be zero we have to
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include two components the first is
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coupon interest payment the second is
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the par value or the principal value of
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a bond which is usually equals to $1,000
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to get the price of a bond we are
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basically converting all the future cash
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flows back to current year year 0 in
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other words the price of a bond is the
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same as the present value of all future
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cash flows I is the discount rate
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required rate or market interest rate n
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is the number of time period until
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maturity
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let's take an example what is the market
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price of a one thousand dollar par value
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20-year bond that pays nine point five
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percent compounded annually when the
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market rate is 10 percent before I show
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you how to do the calculation let's
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understand the meaning of this question
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first $1000 par value this is the future
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value that you will receive at the end
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of maturity date after 20 years of
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investment this is also the face value
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20-year bond represents at the maximum
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period of this investment after 20 years
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this investment will come to maturity
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nine point five percent is the coupon
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interest rate you will have to convert
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it into dollars by multiplying it with
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the par value therefore your coupon
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interest payment is ninety five dollars
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market interest rate is the current
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interest rate people receive in the
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market with similar investments and this
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question is asking you to calculate the
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market price of this bond market price
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means the present value PV to calculate
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the market price of the bond you need to
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use an app called financial calculator
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you may download it from Google Play
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Store or Apple App Store just search
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financial calculator you will find it
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after downloading it open it
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find bond calculator click on it by
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using financial calculator first you
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need to set the compounding to annually
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it means when you invest in this bond
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you will receive the coupon interest
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payment once a year now key in the face
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value or par value FV one thousand
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dollars annual coupon payment PMT taking
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nine point five percent x $1000 face
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value equals to ninety five annual yield
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this is the market interest rate iy
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equals to 10 years to maturity n equals
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to 20 last step just press price button
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you
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we'll get the bond price PV negative
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nine hundred fifty seven dollars and
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forty three cents
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negative signs shown on the financial
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calculator represents that this is a
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payment you pay nine hundred fifty seven
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dollars and forty three cents to
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purchase this bond investment so that
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every year you will receive coupon
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payment of ninety five dollars for
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twenty years at the end of twenty years
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you will get back one thousand dollars
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face value
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let's look at the next example which is
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about semiannual compounding what is the
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market price of a one thousand dollar
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par value 20-year bond that pays nine
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point five percent compounded
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semi-annually when the market rate is
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ten percent using financial calculator
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set compounding to semiannual FV the
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future value is the face value or par
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value equals to one thousand dollars PMT
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annual coupon payment taking nine point
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five percent times one thousand dollars
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par value you will get ninety five
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dollars iy the market interest rate
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equals ten percent n years to maturity
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equals twenty less step press price you
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will get the P V which is the bond price
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equals negative nine hundred fifty seven
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dollars and ten cents again negative
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sign shown on the financial calculator
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represents that this is a payment there
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are many ways to measure bond yield or
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bond return such as current yield yield
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to maturity yield to call and expected
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return I will cover these four measures
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in the following section first current
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yield the current yield measures the
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annual return to an investor based on
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the current price this is the return you
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can earn by holding the bond for one
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year as the market price of a bond will
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constantly change the current yield of a
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bond is also different at varying period
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of time take an example a 10% coupon
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bond which is currently selling at
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$1,150 how much would be the current
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yield by taking 10% times $1,000 par
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value over 1,000 $150 you will get a
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current yield 8.7% yield to maturity is
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another measure of bonds return compared
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to current yield which measures bonds
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returned for one year yield to maturity
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measures the average return of a bond
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for the whole holding period
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an example there was a 7.5% $1,000 par
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value bond that has 15 years remaining
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to maturity and is currently trading in
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the market at 800 $9.50 with annual
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coupon payments annual coupon payments
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means this is annual compounding 7.5
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percent is annual coupon interest rate
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multiplying with $1,000 par value you
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will get $75 coupon interest $75 over
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800 $9.50 current yield is 9.2 6%
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this is the return for the bond in
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current year to calculate the yield to
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maturity YTM it is basically the market
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interest rate or annual yield ìwhy using
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financial calculator set compounding to
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annually pv the current trading bond
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price equals to negative eight hundred
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$9.50 negative sign represents a payment
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FV the future value is the par value
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equals to $1000 PMT annual coupon
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payment taking 7.5% times $1000 par
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value equals to $75 n remaining years to
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maturity equals 15 less step press yield
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you will get the iowa 10.0 one percent
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this is the YTM of the bond compare the
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current yield NY TM y TM is higher than
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current yield therefore for holding the
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bond for 15 years you will get a higher
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average return holding the bond for one
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year will only earn nine point two six
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percent the current yield
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the following is another example for
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calculating the YTM of a semiannual
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compounding bond find the yield to
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maturity on a 7.5% $1,000 par value bond
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that has 15 years remaining to maturity
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and is currently trading in the market
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at eight hundred nine dollars and fifty
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cents with semi-annual coupon payments
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by using financial calculator set
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compounding to semi-annually PV the
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current trading bond price equals to
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negative eight hundred nine dollars and
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fifty cents negative sign represents a
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payment fov the future value is the face
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value equals to one thousand dollars PMT
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annual coupon payment taking 7.5% times
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$1,000 par value you will get $75 n
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remaining years to maturity equals 15
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less step press yield you will get the I
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way nine point nine seven percent this
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is the YTM of the bond
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if the bond is callable we may calculate
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the yield to call ytc as a measure of
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bonds return let's take an example a
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ten-year 8% coupon bond with a par value
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of $1,000 is currently selling at nine
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hundred forty dollars it is five-year
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callable with a call price of one
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thousand eighty dollars to calculate the
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YTM by using financial calculator set
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compounding to annually pv equals
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negative nine hundred forty PMT equals
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eighty FV equals 1000 N equals ten and
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you will get a YTM of eight point nine
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three percent however to calculate the
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ytc PV and PMT will be the same but fe n
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n will be different FV equals two the
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call price which is one thousand eighty
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dollars while n is the callable year
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five years by computing the market
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interest rate iy you will get the ytc
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ten point nine one percent ytc is
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usually higher than YTM it is because
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callable bonds are deemed to be more
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risky expected return is used by
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investors who expect to actively trade
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in and out of bonds rather than holding
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till maturity date it's similar to yield
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to maturity but the estimated market
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price of bond an expected sale date is
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used to replace the par value let's take
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an example find the expected return on a
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seven point five percent bond that is
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currently priced in the market at eight
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hundred ten dollars but is expected to
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rise to nine hundred sixty dollars
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within a three year holding period with
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semi-annual coupon payments to calculate
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the expected return by using financial
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calculator set compounding to
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semi-annually pv equals negative 810 FV
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equals 960 PMT equals 75 and equals
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three and you will get the annual yield
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of fourteen point four one percent
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alright that's all for this video thanks
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for watching see you in the next one bye
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