BONDS

Bond
• A long-term debt instrument indicating that a corporation
has borrowed a certain amount of money and promises to
repay it in the future under clearly defined terms.
Bonds essentials

Face Duration Coupon

value & Rate
Maturity
Bond Process

Income
Cash Cash
Interest Payments Inflow
Outflow
Year1 Year 2 Year3 Year 4 Year 5 Year 6 Year 7

Cash Expense Cash Outflow

Inflow
Type of Bonds

Coupon

Zero
Fixed Flexible
Coupon

Plain Non
Floating
Vanilla Vanilla
Fixed

Outflow -10,000,000 Outflow -2,000,000

Year 1 500,000 Year 1 100,000

Year 2 500,000 Year 2 300,000

Year 3 500,000
Year 3 500,000
Year 4 500,000
Year 4 600,000
Year 5 500,000
Year 5 300,000
Year 6 500,000
Year 6 500,000
Year 7 500,000
Year 7 800,000
Year 8 500,000
Year 8 500,000
Year 8 1,000,000
Year 8 1,000,000
Flexible
Zero Coupon Bond

Borrow $
5,000,000

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

The difference of $
2,000,000. being Return $
coupon paid at end 8,000,000.
Types With respect to redemption

Redemption

Series Callable Puttable Perpetual Convertible

The The Lender The Interest Bond can be

Same day
borrower may ask the payment will converted in
issuance
may return money continue to share
Same Day
Money earlier Inanity
Redemption
earlier
Types with Respect to Security

Security
Backing

Secured Unsecured

With Specific With general

Asset Asset
Backing Backing
Bonds Valuation

Cash Flow during the year

Amount
Returned
Bonds Valuation
Bonds Valuation
Bonds Valuation
Bond at premium and discount
YTM
• Yield to maturity (YTM) is the total return anticipated on a
bond if the bond is held until it matures
• Yield to maturity is considered a long-term bond yield but
is expressed as an annual rate. In other words, it is the
internal rate of return (IRR) of an investment in a bond if
the investor holds the bond until maturity, with all
payments made as scheduled and reinvested at the same
rate.
YTM
• ytm=
𝐿𝑜𝑤𝑒𝑟 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 + 𝐷𝑖𝑓𝑓𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒
𝑃𝑉 𝐴𝑡 𝐿𝑜𝑤𝑒𝑟 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒 − 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒
×
𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑑𝑖𝑓𝑓𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑃𝑉
Illustration
• A corporation purchased a 8% ,9 years bond of a face
value of 100 for 85 each. What is the YTM of the bond.
• We will try the valuation of this bond at 10% and 12%.

• 12%
• 8 × 5.328 + 100×0.361
• 42.62+36.10 = 78.72
• 10%
• 8 × 5.759 + 100×0.424 = 88.47
YTM
(88.47−85)
• YTM= 10 + (12 − 10) ×
(88.47−78.72)
3.47
• Ytm = 10+2 ×
9.75
• Ytm= 10+2×0.356
• YTM= 10+.712
• Ytm = 10.712
• 10.7%