Finance 1st paper [Chapter-6]

Required amount of fund collected by a business enterprise for meeting up fund requirement for acquiring
important useable items from which there is long term benefit expectation and making investment for
earning expected return over long period of time from different available sources for more than
5/7/10/15years time period is known as long term financing.

Characteristics of Long-term Financing:

a) Duration
b) Size of the fund
c) Uses of fund
d) Security
e) Source of fund
f) Repayment method
g) Fixed interest
h) Dividend

Sources of long-term Financing:

Bond Concept: Bond is a long term dept instrument issued by corporation or government.
Bond issuing Authority-
1) Government
2) Corporation
3) Municipal authority
4) Foreign government or authority
Classifications of bond-
1. On the basis of Security-
a) Secured bond
b) Unsecured bond
2. On the basis of Mortgage-
a) Mortgage bond
b) Equipment bond
c) Chattel bond
3. On the basis of repayment-
a) Redeemable bond
b) Sinking bond
c) Serial bond
d) Perpetual bond
4. On the basis of registration-
a) Registration bond
b) Unregistered bond
5. On the basis of issuer-
a) Treasury bond
b) Corporate bond
c) Municipal bond
d) Foreign bond
6. Special type of bond-
a) Income bond
b) Callable bond
c) Put bond
d) Coupon bond
e) Zero coupon bond
f) Perpetual bond
g) Junk bond

Determination of value of bond-

1. The bond that contains specific interest rate, maturity date and face value is called Coupon
bond.
1
Coupon bond,

V B = Value of bond
[
V B =I
1−

kd
]
(1+ kd)n
+
MV
(1+ kd )
n

i= coupon rate
FV= Face value
I= amount of annual interest= FV× i
n= Duration of bond
K d = Expected rate of return
MV= Maturity value
 2. The bond on which no interest is paid is called zero coupon bond.
MV
Zero coupon bond, V B = n
(1+ Kd)

3. Perpetual bonds are the bonds which have no maturity date and keep on paying interest to the
investors regularly.
I
Perpetual bond, V B = Kd

Exercises:
1.
Particulars ACI COMPANY ACME COMPANY
Face value TK. 2,000 TK. 2,000
Coupon rate 12% 14%
Period 20 years 20 years
Market value TK. 1600 TK. 1900
Required rate of 15% 15%
income
Maturity value At 5% premium At 5% discount

Question- Determine present value of mentioned company’s bond and which bond will be
more profitable? And why?
2. ABC ltd. issued some 10year bond in 2014, face value of which is TK. 1,000. Coupon
rate is 9%, interest is paid semi-annually and required rate of return of the bonds are
12%. Calculate value of bond of ABC ltd. Will you buy this bond if the present
market value becomes TK. 900?