FACULTY OF

FINANCE AND COMMERCE

Corporate Finance

MA. Tran Minh Tu

Bond
Bond and
and
Valuation
Valuation
Contents

- Interest, the structure of interest term.

- Kinds of Bond
- Bond valuation
 I. Kinds of interest
1. Definition

The interest rate / rate of return is the cost of using capital, a

certain percentage is generated from a loan/lend transaction.

Elements impact the interest:

Inflation Risks Liquidity

 I. Kinds of interest
1. Definition
A continuous increase in the overall price
of goods and services in a certain period,
causing a currency to lose its value.
Inflation

Monetary policy

Currency fluctuations

Political events
 I. Kinds of interest rate

Nominal interest rate Real interest rate

- The interest rate exchanges
capital between the providers
of capital and the demand for
capital in transactions.
- When the supply and
demand are equal.
- Change depends on
economic conditions,
such as risks, or the
liquidity of the market

Nominal interest rate = Real interest rate + Inflation + Risk premium

 I. Kinds of interest

Nominal interest rate = Real interest rate + Inflation + Risk Premium

r = r* + IP + RP

R : Nominal interest rate

r* : Real interest rate
IP : Inflation
RP: Risk Premium
II. Term Structure of Interest
1. Definition
Cấu trúc kỳ hạn của lãi suất là mối quan hệ giữa
thời gian đáo hạn và tỷ suất sinh lời có cùng mức độ rủi ro.
Được thể hiện trên đường cong lợi tức (Yield Curve).
Interest rate

Yield Curve

Time
 II. Term Structure of Interest
2. Types of Yield Curve
Đường cong lợi tức lồi (normal yield curve): The yield curve is
formed under normal conditions when investors expect has no macro
changes and the economy maintains a normal growth rate.

Short–term rate < Long-term rate

Yield

Time
 II. Term Structure of Interest
2. Types of Yield Curve
Đường cong lợi tức phẳng (flat yield curve): The yield curve is
formed in the context of investors having conflicting expectations in
the market.
Yields of different terms tend to be equal, often occurring during the
transition of an economy from crisis to growth or opposite.

Short–term rate = Long-term rate

Yield

Time
 II. Term Structure of Interest
2. Types of Yield Curve
Đường cong lợi tức lõm (inverted yield curve): formed under
unusual market conditions.

It is a warning signal for the economy to fall into recession or crisis.

Short–term rate > Long-term rate

Yield

Time
 III. Bonds

A bond is a certification of an issuer's long-term

liability to pay the bondholder for a specified
amount (par value of the bond), for a specified time
and with a fixed yield.

Issuer Holder
Người phát hành Người sở hữu
III. Bonds
Government’s Bonds
III. Bonds
The firm’ bonds
III. Bonds
 III. Bonds
2. Characteristic of Bonds

- Có sẵn mệnh giá (Par Value- giá trị danh nghĩa): Tiền do tổ
chức phát hành vay và cam kết trả nợ vào ngày đáo hạn.
- Ngày đáo hạn (date due) được ấn định cụ thể, tổ chức phát hành
phải hoàn trả nợ gốc cho người sở hữu theo mệnh giá.
- Lãi suất (rate) có thể cố định hoặc thả nổi tùy thuộc vào nhà
phát hành
- Trái phiếu có thể được bảo lãnh của bên thứ 3
- Trái phiếu phát hành từ công ty càng an toàn thì lợi tức của trái
phiếu càng thấp
 III. Bonds
2. Characteristic of Bonds
- The bond's issuer can be an enterprise, or an organization of government such as:
State Treasury or the government.

- Any individual, business or government can buy bonds.

– The bond's lender does not bear any responsibility for the borrower's efficient use
in business . The issuer must be obliged to pay the debt as committed in the loan
agreement.

- Bonds bring income as interest, it is a fixed regular income and it does not depend
on business results.

- The nature of bonds is debt securities, if the company is dissolved or bankrupt, the
company's assets must first be paid to bond holders as a compulsory obligation.
 III. Bonds
3. Types of Bonds

a. Acording to issuer

Goverment’s bonds

Firm’s Bonds

Bonds of banks
 III. Bonds

Classification of bond yields:

Fixed-rate bonds: The interest is determined by a fixed
percentage (%).

Variable-Rate (floating-rate) bonds: The interest is paid

different in periods, and calculated based on the reference
rate.

Zero-interest bonds: Buyers receive no interest, but

allowing to buy at lower price than the par value (purchase at
a discount) and returned at par value when the bond expired.
 III. Bonds
Classification according to the issuer's payment
guarantee:

Security bond: A type of bond, the issuer uses a valuable

asset as a guarantee for issuing. When the issuer loses its
payment, the bondholder has the right to collect and sell
assets to recover the outstanding amount. The asset can be
deposit, stocks, or real assets.

Unsecured bond: A type of bond issued with having no

assets for security. It is guaranteed by the credibility of the
issuer.
IV. Bond valuation

V0 ) +

V0 : present value of bond

I: Interest (I = M*r)
r : rate
n: number of period
M: Par value
d : required rate - tỷ suất lợi nhuận
yêu cầu
 IV. Bond valuation

V0 ) +

B0 : present value of bond

I: Interest (I = M*r)
r : rate
n: number od period
M: Par value
d : required rate - tỷ suất lợi nhuận
yêu cầu
 IV. Bond valuation

Nguyen Kim's bond has a par value of 10 million

VND. Bond's interest rate is 10.3% / year, annual
interest payment. Repay capital when it is due. The
issue date is 22/10/2019, due date 22/10/2024. The
required rate of return is 10.25% / year.
Valuation of bonds at the time of issue?

V0 ) +
 IV. Bond valuation
MV: 10 million.
r: 10.3%/year.
V0 ) + rd: 10.25%/year.
n: 2024 – 2019 = 5.

I = M . r = 1.03 million

V0 ) +

=> V = 10,018,000 million

 IV. Bond valuation
TP chiết khấu : rd > r => V < M
TP bán bằng mênh giá : rd = r => V = M
Tp thưởng : rd < r => V > M
 IV. Bond valuation

Company C has outstanding bonds with par value of $ 1,000,

coupon rate of 12%, annual interest payment, and the remaining
maturity period is 7 years.

1. If the bond's interest rate and current risk level have a return
rate of 10%, what price should company C sell the bond in the
present?

2. If the rate of return was 12%, what is the present value of this
bond?
V0 ) +
3. Compare with the results calculated.
Thank You