Welcome to Finance and Excel video number 47.
Hey, if you want to download this workbook or the PDFs
for chapter 6, just click on the link below this video
and then scroll all the way down to the finance class section.
Hey, in this video, we're going to start [? in on our ?] PDFs.
Last video, we did the math calculations for a coupon bond
for the bond holder.
The bond holder's buying a future set of cash flows.
Now, this is the day that the bond was issued.
So when we did our calculation, this bond holder
was willing to pay $975.02, which is a cash flow out.
We'll need to pay that much for these future [? click ?]
cash flows.
Now, this is on the day that the bond was issued.
But this bondholder could go ahead and hold it.
But what if-- and we have a picture of the bond holder.
Here's the bond holder.
The bond holder, she's holding this coupon bond contract.
And now two years have elapsed.
So there's period 4, 5, and 6.
These cash flows are the only ones left--
$50 here, $50 here, and $1,000 here.
So this contract now has the right
to receive these future cash flows.
Well, this contract can be sold.
So bondholder number 1, now bond seller
in the secondary market--
this transaction, no money is going to the corporation,
she sells, bondholder number 1, to bondholder number 2.
And this guy pays $1,009.36, and he's
paying that amount for these future cash flows.
Now let's go up and look at this.
And we'll talk about why this is a premium,
and why the last example we did is a discount in a later video.
But here's our calculations.
So bondholder number 1 sells to bondholder
number 1 at the end of year 2.
And the rate in the market, yield to market rate
on similar securities, is 9%.
So here's our coupon.
The coupon is still the same.
It's just the yield to market.
This is the discount.
Now notice, this rate is less than the coupon.
So we're going to do the math, and we come down here.
These are the cash flows.
We're solving for present value at time 4.
Here's our calculation.
We plug everything in.
And this bondholder pays bondholder number
$1,009.36 at time period 4 in order to get future cash flows.
Now, there's our little drawing there.
There's our two bondholders.
Let's go over and do the math.
So I'm on sheet 6 to 10.
In the last video, by the way, it said 6 to 7,
and that was incorrect.
So here we are.
Same face value, and this is from the point of view
of the bondholder number 2.
We're going to do the calculation in terms
of the person buying the bond.
So we still need to do our coupon rate.
That's the 10%.
Hey, that's in the contract.
It just sits in that contract, however
long that contract exists.
We divide that by 2.
Our total number appears-- oh.
n still is 2, but there's only one year left.
So that means there's two periods.
The PMT is going to be our 5%, period rate times our face.
Notice, we're using the coupon rate to calculate PMT only.
This actually should say a coupon.
Look, it automatically changed to [INAUDIBLE]..
And this should be [INAUDIBLE].
Now, our yield to market-- oh, it's 9%.
We will come to some conclusion about how rates move
and what happens to the price of the bond in our next video.
There it is, 9%.
Just at this point, take note that the last example
in the last video was at 11%, which was more than the coupon.
This one is less than the coupon.
So yield to market, we still have
to take that market rate divided by 2.
And now we do our present value calculation.
Hey, the rate-- oh, that's our new yield to market.
Remember, this is two years out.
They're selling this, so you just
got to use the rate in the market.
And all we're doing is using that rate
to discount these cash flows Nper, PMT.
This is from the point of view of the second bondholder,
so that's coming in.
That's the interest payment.
Same with the future value.
So we answered that.
But [? no, ?] we want to take notice of a pattern here.
And I'm going to zoom in out on this, and notice.
So the face value, $1,000 on all of these examples.
We're just going to look at the coupon bond here.
But $1,000. $1,000, $1,000.
What happens when the rate, the yield to market, the market
rate is less than the coupon rate?
Well, it looks like this amount is greater than the face value.
So that's pattern number 1.
What about over here?
Same $1,000, 10%.
Oh, but the rate is greater than.
Let's see.
This is less then $1,000?
Same with over here.
This is just a different point of view.
Now here's the deal--
and we have a whole couple of videos
coming up just on this topic.
But to end this video, I want you to notice,
if the corporation says, hey people,
I'm offering you 10% in this contract--
but similar securities out in the market,
on the day you issue this, are offering 11%,
nobody would come and buy a 10% interest rate.
So the deal is, you have to discount
the security you're selling.
So in order to get people to take your 10%,
you have to reduce the price.
Everyone else is offering 11% out in the market
on this particular day.
Your contract says 10%.
No problem.
Just reduce the price, and then people
will actually come and buy it.
Same situation over here.
We have 10% and the market's offering 9%.
That means every single person would
rush over to this corporation and say, I want this rate.
So what do they do?
They raise the price.
Now, when you issue a bond above the face value,
you raise the price.
And so you use the word premium.
This bond is issued at a premium.
This one is issued at a discount.
Now, you can think of this just like the store.
Here's the face value.
But since the rate is lower than everything in the market,
you have to discount it a little bit.
So that's what they use.
This bond is issued as a discount.
This one, much better 10% than the actual going market rate.
So we can sell it at a premium.
We'll see you next video.