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    Bonds and Their Valuation

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    anniconunes020

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    Bonds and Their Valuation

    Uploaded by

    anniconunes020
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    Download as pptx, pdf, or txt
    5 views12 pages

    Bonds and Their Valuation

    Uploaded by

    anniconunes020

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    You are on page 1of 12

    FINANCIAL

    MANAGEMENT
    BONDS AND
    THEIR
    VALUATION
    Who Issues
    Bonds?

    01
    A bond is a long-term contract under which a borrower agrees to make
    payments of interest and principal on specific dates to the holders of the
    bond

    Treasury Corporate Municipal Foreign Bonds


    Bonds
    Referred to as Bonds
    Issued by Bonds
    Bonds issued by are issued by a
    government business firms state and local foreign
    bonds, are governments government or
    issued by the a foreign
    federal corporation
    government

    02
    Par Value
    01 The par value generally represents the
    . amount of money the firm borrows and
    Characteris promises to repay on the maturity date.
    Coupon Interest
    02.
    tic of Bonds The stated annual interest rate on a bond.
    Date
    Although all bonds have Maturity Date
    some common 03. A specified date on which the par value of
    characteristics, different a bond must be repaid.
    types of bonds can have
    Call Provision
    different contractual features. 04. A provision in a bond contract that gives
    the issuer the right to redeem the bonds
    under specified terms prior to the normal
    maturity date.
    03
    Sinking
    05
    Characteris .
    The par value generally represents the
    Funds
    amount of money the firm borrows and

    tic of Bonds promises to repay on the maturity date.


    Convertible
    06. Bonds that are exchangeable into shares of
    Bonds
    com- mon stock at a fixed price at the
    option of the bondholder.

    04
    r: the market rate of interest on the bond

    Bond N: the number of years before the bond matures


    INT: dollars of interest paid each year
    Valuation M: the par, or maturity, value of the bond

    The following general equation can be solved to find the


    value of any bond:

    05
    Bond
    Valuation

    06
    Yield to Maturity
    The rate of return earned on a bond if it is held to
    Bond maturity
    Suppose you were offered a 14-year, 10%
    Yields
    an estimate of the rate of
    return we would earn if we
    annual coupon, $1,000 par value bond at a
    price of $1,494.93. What rate of interest
    purchased the bond today would you earn on your investment if you
    and held it over its bought the bond, held it to maturity, and
    remaining life.
    received the promised interest pay- ments
    and maturity value?

    07
    Yield to Call
    The rate of return earned on a bond when it is
    called before its maturity date
    Bond
    For example, if Allied’s 10% coupon bonds
    Yields
    an estimate of the rate of
    return we would earn if we were callable and if interest rates fell from
    purchased the bond today 10% to 5%, the company could call in the
    and held it over its 10% bonds, replace them with 5% bonds,
    remaining life. and save $100 2 $50 5 $50 interest per
    bond per year. This would be beneficial to
    the company, but not to its bondholders.

    08
    Assessing a Bond’s
    01. Riskiness
    02. 03.
    Price Risk Reinvestment Comparing Price Risk
    The risk of a decline in Risk and Reinvestment
    a bond’s price due to The risk that a decline Risk to the
    Price risk relates
    an increase in interest in interest rates will current market value
    rates. lead to a decline in of the bond portfolio,
    income from a bond while reinvestment risk
    portfolio. relates to the income
    the portfolio produces.

    09
    Various Types of Corporates
    01. Bonds
    02. 03.
    Mortgage Bonds Debentures Subordinated
    A bond backed by Debentures
    A long-term bond that Bonds having a claim
    fixed assets. First
    is not secured by a on assets only after
    mortgage bonds are
    mortgage on specific the senior debt has
    senior in prior- ity to
    property. been paid in full in the
    claims of second
    event of liquidation.
    mortgage bonds.

    10
    Terima Kasih

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