《L4_bond_valuation》.pdf
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Corporate Finance
Lecture 4: Bond Valuation
Dr. Zhang
March 2010
What we learned last time
Present values and future values
The rationale of discounting cash flows.
Stated interest rate v.s. effective interest rate.
Formulas and applications
Irregular cash flows.
Mortgages
Auto loans
Saving for education or retirement
2010-3-15 2
More on compounding
Continuous compounding: what if the
compounding period becomes infinitesimal?
r = stated annual rate.
Effective annual rate is
4
(1+r/4) – 1, if compounding period = quarter;
(1+r/12)12 – 1, if compounding period = month;
(1+r/365)365 – 1, if compounding period = day;
n
Lim (1+r/n) – 1 = exp(r) as n→∞, which means that
there are infinite compounding periods in one year, i.e.
the compounding period is infinitesimal (approaching 0).
2010-3-15 3
More on 等本息and 等本金
They are two different payment schedules.
等额本息(equal payments): each payment is
identical throughout the overall payment
period.
等额本金(equal principal): the principal part in
each payment is equal.
Example: Consider a 12-month loan of ￥4000.
APR=7.2%. Make detailed payment schedules
for Plan A (等本息) and Plan B (等本金). See
the excel file.
2010-3-15 4
More on deferred taxes
Resulting from temporary
differences between book (accounting)
value of assets and liabilities and their tax
value.
Deferred tax liabilities are provided in order
that investors may understand the future
tax liabilities that may arise as a result of
ac
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