Professional Documents
Culture Documents
Bond Valuation
Bond Valuation
Bond
4. Redemption
3.1.Maturity
Face Value
Premium
Date
5. Basis Points
Principal
Bonds areamount
Date on 2.
not always
onwhichCoupon
which
redeemed
the rateatisispar
interest
bond paid
onby
repaid thethe
maturity
issuer
One date. Some bonds
hundredths of onepay a premium
percent. Changes in addition to rate
in interest the
The annualbetween
and difference rate atface
which
two interestrates
value
interest is paid
are usually
stated in terms of basis points.
Types of bonds
Registered
Senior
Secured and
v/sv/s Un-registered
Sub-ordinate bonds
Unsecured bonds
Convertible and non-convertible debentures
On the dimension of transferability…..
Holders
Unsecuredof senior
bondsbonds
have no
havecharge
to beon
paid
anyinspecific
full before
assets
Unregistered
Conversion bonds
into areshares
equity freely at
negotiable
the can and
option of can
theabe
bondtransferred by
the
of the
sub-ordinate
company while
bond secured
holders bonds
be carry
paid fixed holders.
or
aCan
simple endorsement. or partially convertible
befloating
fully-convertible
charge on the assets of the company
Registered bonds can be transferred only by executing a transfer
deed and filing a copy with the company
Bond Market Innovations
Indexed
Junk Bonds
Bonds
Floating
Preferred stockRate Bonds
or Preference
International Bonds Share
Corporate
Treasury
Principal Issued
and coupon Bonds
Bonds are linked to
payments
by companies.
Interest
At the
Issued rates
time
by of are floating
liquidation,
borrowing with
company some
priority
in reference
between
another bond
country
market
Considered index
highly like inflation
speculative and price
because index.
of high
Bonds rate
issued in the
by market
corporate sector
and the bond
Attractive toand
Bonds is equityby
issued holders.
government
risk of defaulttheyinare
denominated
investors as thesafer
currency
than of
Dividends
conventional payable
the country bonds are
wherein cumulative.
of realHave
it is marketed
terms or priority
soldrate
interest
riskover equity share
and inflation holders risk
expectation
Bond Valuation
Value of a bond
= Annual Interest Payable * PVIFA
+
Redemption Value * PVIF
Bonds with semi annual
interest
V = I/2*PVIFA(k/2,2n) + F*PVIF(k/2,2n)
Bond Yield Measures
The bond investor typically receives income from
the following:
Principal Recoveries
3. Cash realization on sale of bond
4. Redemption of the bond by the issuer at a contracted value
Coupon Interest
CY =
Prevailing Market Price
Drawbacks:
Considers only coupon income as source of return;
ignores capital gains (losses)
Yield to Maturity
Measured by comparing the present values of
1. Interest payments at a contracted rate i.e. coupon interest
4. Redemption of the bond by the issuer at a contracted value
n
It Pt
Po =
Σt=1
+
(1+r)t (1+r)n
Po : Cost of bond
It : Annual interest in `
r = discount rate = YTM
t = time period
A bond with an annual coupon rate of 12.5%
redeemable on 1-10-2014 is selling at ` 80.60 on
1-10-2010. What is the return earned by the
investor who buys the bond on 1-10-2010 and
holds it till maturity?
2
The previous problem……
100-80.6
12.5 +
3
YTM =
(100+80.6)
= 20.99%
Zero Coupon Bond
Maturity Value
P =
(1+r)n
Duration
Po CMP
Time
PV of
Year Annual CF PV@18% PV/CMP weighted
annual CFs
relative CF
1 2 3 4=2*3 5 6=5*1
1 15 0.847 12.712 0.142 0.142
2 15 0.718 10.773 0.120 0.241
3 15 0.609 9.129 0.102 0.306
4 15 0.516 7.737 0.086 0.346
5 15 0.437 6.557 0.073 0.366
6 115 0.370 42.600 0.476 2.856
4.257
Price-Yield Relationship
= 10*PVIFA(4,10) + 100*PV(4,10)
= 10*8.111 + 100*0.676
= 148.7
……….