Chapter 6
Valuing Bonds
I. Chapter Outline
The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides
are referenced in bold. Alternative Examples to selected textbook examples are also available in the
PowerPoint Lecture Slides and are also referenced in bold.
6.1 Bond Cash Flows, Prices, and Yields (Slide 7)
• Bond Terminology (Slides 7–8)
• Zero-Coupon Bonds (Slides 9–10)
– Yield to Maturity (Slides 11–13)
• PowerPoint Alternative Example 6.3 (Slides 29–30)
• Example 6.4 Computing a Bond Price from Its Yield to Maturity (Slides 31–33)
• PowerPoint Alternative Example 6.4 (Slides 34–35)
6.2 Dynamic Behavior of Bond Prices (Slide 36)
• Discounts and Premiums (Slides 37–39)
• Table 6.1 Bond Prices Immediately After a Coupon Payment (Slide 39)
• Example 6.7 The Interest Rate Sensitivity of Bonds (Slides 57–58)
• PowerPoint Alternative Example 6.7 (Slides 59–61)
• Figure 6.2 Yield to Maturity and Bond Price Fluctuations Over Time (Slide 62)
6.3 The Yield Curve and Bond Arbitrage (Slide 63)
• Replicating a Coupon Bond (Slides 64–66)
• Table 6.2 Yields and Prices (per $100 Face Value) for Zero-Coupon Bonds
6.4 Corporate Bonds (Slide 74)
• Corporate Bond Yields (Slides 75–83)
– No Default (Slide 76)
• Figure 6.3 Corporate Yield Curves for Various Ratings, June 2012 (Slide 88)
• Figure 6.4 Yield Spreads and the Financial Crisis (Slide 89)
• Global Financial Crisis: The Credit Crisis and Bond Yields
6.5 Sovereign Bonds (Slide 90)
• Figure 6.5 Percent of Debtor Countries in Default or Restructuring Debt, 1800–2006 (Slide
91)
Chapter 6 Appendix Forward Interest Rates (Slide 96)
• Computing Forward Rates (Slides 96–101)
• Example 6A.1 Computing Forward Rates (Slides 102–103)
• Example 6A.2 Forward Rates and Future Spot Rates (Slides 108–109)
II. Learning Objectives
6.1 Identify the cash flows for both coupon bonds and zero-coupon bonds, and calculate the value
for each type of bond.
6.3 Given coupon rate and yield to maturity, determine whether a coupon bond will sell at a
6.4 Illustrate the change in bond price that will occur as a result of changes in interest rates;
differentiate between the effect of such a change on long- versus short-term bonds.
6.6 Define duration, and discuss its use by finance practitioners.
24 Berk/DeMarzo • Corporate Finance, Fourth Edition
6.8 Discuss the relation between a corporate bond’s expected return and the yield to maturity;
define default risk and explain how these rates incorporate default risk.
6.9 Assess the creditworthiness of a corporate bond using its bond rating; define default risk.
III. Chapter Overview
6.1 Bond Cash Flows, Prices, and Yields
Terminology is an important part of understanding bonds. The authors use zero-coupon bonds as
examples in much of the chapter. Yield to maturity for a zero-coupon bond is
6.2 Dynamic Behavior of Bond Prices
The authors begin with a discussion of discount and premium bonds. Table 6.1 summarizes the
properties of coupon bond prices. The rest of the section examines the effect of time and interest rates
6.3 The Yield Curve and Bond Arbitrage
This section shows how the yield curve relates to the valuation of coupon bonds. The Law of One
Price dictates that the price of a coupon bond must equal the sum of the prices of a series of zero-
6.4 Corporate Bonds
In this section, the authors use the two extremes of no default and certain default to show that the
yield to maturity is not equal to the expected return of a defaultable bond because we used promised
cash flows to calculate the yield to maturity and expected cash flows to calculate the expected return.
6.5 Sovereign Bonds
Chapter 6 Appendix Forward Interest Rates
IV. Spreadsheet Solutions in Excel
The following Problems for Chapter 6 have spreadsheet versions of the problems available: 3, 4, 13,
14, 25, and 31.