VALUATION OF SECURITIES

BOND VALUATION

Learning objectives

Estimate the price of a bond. Calculate various measures of bond yield.

Basic chacter A bond represents a security issued in connection with a borrowing arrangement. It is an IOU issued by the borrower.A bond obligates the issuer to make specified paymentsi,e, interest and principal to the holdrs. A bond may be described in terms of par value, coupon rate, and maturity date.Bond Indenture: The contract between the issuer and the

Changing complextion of bond Market in India

Pre-liberalisation. Instruments: Plain vanilla bonds. Interest rates: Stable & administered. Number of players: Few players in debtmarket. Reference rate: No Methods of Analysis:current yield, period& rules of thumb. Post-Liberalization. Bonds with complex fearures. Volatile & Marketdetermined. Many players. Reference rate is gradually emerging. More scientific methods

 Nature of market.: Highly liquid. Approach to P.M:Passive

Liquiduty. Active.

Types of bonds. Government Bond: Largest borrowersstate and central Govts. Corporate bonds Straight bonds: Zero coupon bonds: Floating rate bonds: Bonds with embedded options: convertible bonds callable bonds puttable bonds

Bond Prices The value of a bond is equal to the present value of the cash flows expected from it. Hence, it requires: An estimate of expected cash flows. An estimate of the required return.

Assumptions of Bond Valuation: (Simplify analysis)

Coupon rate of interest is fixed for the term of the bond. The coupon payments are made every year & the next coupon payment is receivable exactly a year from now. The bond will be redeemed at par on maturity.