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Source: Reprinted by permission of The Wall Street Journal, via Copyright Clearance Center © 2001 Dow Jones and Company, Inc., May 11, 2001. All Rights Reserved Worldwide.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

III. Valuation of Future Cash Flows

7. Interest Rates and Bond Valuation

© The McGraw-Hill Companies, 2002

PART THREE Valuation of Future Cash Flows

Current and historical Treasury yield information is available at www.publicdebt. f treas.gov/of/ofaucrt.htm.

1.4375 percent, of face value from the previous day. Finally, the last number reported is the yield to maturity, based on the asked price. Notice that this is a premium bond because it sells for more than its face value. Not surprisingly, its yield to maturity (5.86 percent) is less than its coupon rate (8 percent).

Some of the maturity dates in Figure 7.4 have an "n" after them. This just means that these issues are notes rather than bonds. Other entries have a range of maturity dates. These issues are callable. For example, locate the issue whose maturity is given as "May 05-10." This bond is callable as of May 2005 and has a final maturity of May 2010. The bonds with an "i" after them are the inflation-linked bonds we discuss in the next sections.

The very last bond listed, the 5 3/8 Feb 31, is often called the "bellwether" bond. This bond's yield is the one that is usually reported in the evening news. So, for example, when you hear that long-term interest rates rose, what is really being said is that the yield on this bond went up (and its price went down). In very recent times, attention has shifted away from the long maturity bonds to the 10-year maturity range, and, in the fall of 2001, the Treasury announced that it would no longer issue 30-year bonds.

If you examine the yields on the various issues in Figure 7.4, you will clearly see that they vary by maturity. Why this occurs and what it might mean is one of the things we discuss in our next section.

exampleTT"!

Treasury Quotes

Locate the Treasury note in Figure 7.4 maturing in February 2008. What is its coupon rate? What is its bid price? What was the previous day's asked price?

The note listed as 5>2 Feb 08 is the one we seek. Its coupon rate is 5>2, or 5.5 percent of face value. The bid price is 102:08, or 102.25 percent of face value. The ask price is 102:10, which is down by 18 ticks from the previous day. This means that the ask price on the previous day was equal to 102 10/32 + 18/32 = 102 28/32 = 102:28.

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