A long term fixed income security in which the

issuer has agreed to pay income payments for a

specified period and to repay the principal at
maturity to the bondholder.

An evidence of indebtedness issued by a

borrower; an “IOU” to repay the debt at maturity
date.
MECHANICS OF BOND

A NEED FOR CAPITAL

INVESTORS
(LENDERS)
ISSUER (BORROWER)
BOND PN
BOND SN

COUPON $$

PRINCIPLE $$
PAYMENT DIAGRAM
-HONOUR SECONDARY NOTE-
PAY COUPON (5% per annum)

5 million 5 million 5 million 5 million 5 million

YEAR 0 1 2 3 4 5
Bond is a money tree!
CHARACTERISTICS
Trustee
• A third party to the bond indenture
• Individual / corporation / investment bank
• Responsible to ensure the issuer does not default their contractual obligation
• Act on behalf of the bondholders.
Bond indenture
• A legal agreement between the issuing firm and the bond trustee who
represents the bondholder‟s interest.

Bond‟s principal / Par Value = RM1000

Coupon
• Is the interest payment to be paid to bondholder along the period.
• The coupon rate in fixed and depends on the number of compounding.

Terms of coupon payment

• Annually @ Semi-annually
 Has maturity period

• Principle will be paid back at maturity

Call feature
• Bond issuer can buy back / redeem the bond before
maturity

Call price
• The price at which the bond will be bought back before
maturity

Call premium (discount)

• Happen if the call price exceeds (lower than) the par
value
TYPES OF BOND
Senior bond @ secured bond
• Backed by mortgage
• Secured by collateral
Junior bond @ unsecured bond
• No collateral to back it up
• Only backed by verbal contracts
• Issued only by high credit rating @ goodwill co.
Convertible bond
• Can be converted into common stocks
Straight bond
Perpetual bond
Zero-coupon bond
Government bond
Private Debt Securities (PDS)
ISSUING BONDS

ADVANTAGES DISADVANTAGES

 The interest to be paid  High risk if unable to

to bondholders are tax- pay the coupon and
principal back.
deductible.
 May be sued if the
 Creditors (bondholders) issuer default payments.
will not interfere in  Must have stable
management matters, income because the
unlike common issuer need to pay a
fixed amount of coupon
shareholders. payments.
INVESTING IN BONDS
ADVANTAGES
 Fixed rate of return
(coupon), and is not
affected by market
forces.
 Priority on earnings and
asset.
 Bondholders will be paid
first before shareholders.
 Can convert status.
DISADVANTAGES
 Possibly low return
 Low liquidity
 Hard to be bought & sold.
 The trading process is
harder than equity.
 More expensive
 Par Value = RM1000 each
 No voting rights
 Creditors cannot vote for
B.O.D or company‟s
decisions.
Note: all answers
will be in %
Notations for calculation
 C = Coupon rate
 i = Interest rate / market yield / discount rate
 PV = Par Value = RM1,000
 MP = Market Price / Market Value of the bond
 n = no of years to maturity

 Pc = Call Price
 nc = no of years held
EXAMPLE
A 6%, 20 years bond has remaining 15 years to
maturity. The current market price of the bond is
RM900. The bond is compounded annually.

The bond is callable after 4 years holding period at

price of RM950. The bond is compounded annually.
 Find:
1) NOMINAL YIELD
 Is the coupon rate itself.

Nominal yield = C =6%

2) CURRENT YIELD
 Compares between the amount of coupon
payments with the current market price.

Current Yield =
3) YIELD TO MATURITY (YTM)

-is the yield available for the bondholder until the

maturity of the bond.

YTM =
4) YIELD TO CALL (YTC)

-is the yield available for the bondholder until the

bond is called (redeemed) back before
maturity.

YTC =
COMPUTING YIELDS WITH SEMI-ANNUAL
COMPOUNDING

Effects:
C ÷2
n x 2
nc x 2

Answers must be given in „per annum‟ form.

Answer x 2
MAC 2012 – Q1(b)

Gold Berhad has a bond that currently sells at 90

percent of its par value with 10 percent coupon rate
and 10 years to maturity. Calculate:
i) Its current yield
(2 marks)
ii) Its yield to maturity
(4 marks)
iii) Its yield to call if Gold Berhad decide to call back the bond
after 7 years at RM 1,000
(4 marks)
SEP2011-Q5(b)

i. Determine the bond‟s current Yield-To-maturity

(YTM) (4 marks)

ii. If your required rate of return is 10 percent, will

you invest in this bond? Why? (2 marks)
 A 7%, 15-year bond has 5 years left to maturity. The
bond is now selling at RM980. The bond can be
called back after 8 years at RM950. The bond is
compounded annually. Calculate:
i. Nominal yield
ii. Coupon payment
iii. Current yield
iv. Yield to maturity. If your required rate of return is
10%, will you buy this bond?
v. Yield to call
Objective: to find the
• Intrinsic value
• Real value
• True value
• Fair value @ price
• Price of the bond today

Note: all answers will be

in RM
 VALUATION ANALYSIS
 Valuation is done by calculating the intrinsic or real
value of the security, then comparing it with the market
price.
 The security is  The security is
UNDERVALUED if the OVERVALUED if the
market price is smaller market price is larger
than the intrinsic value. than the intrinsic value.
 So, an investor will prefer  So, an investor will NOT
to BUY undervalued BUY overvalued securities
securities because it is because it is being sold
being SOLD CHEAPER MORE EXPENSIVE than its
than its real price. real price.
STRAIGHT BOND
 Has both maturity period and coupon rate.
Pb = C (PVIFA i,n) + PV (PVIF i,n)

=C 1- + PV

i
Find the fair value of a 20-year bond that has 10% coupon
if the market rate is 8%. The bond is compounded annually.

 Solution:
COMPUTING VALUATION WITH SEMI-
ANNUAL COMPOUNDING

Effects:
C ÷2
i ÷ 2
n x 2
DETERMINATION OF OVER/UNDERVALUED
Pb vs. MP Valuation Decision
Pb > MP The bond is undervalued Buy!
Pb < MP The bond is overvalued Don‟t buy!
•State your decision if:
•The bond‟ market price = RM1,200?
Pb Vs. MP
RM1,196 < RM1,200
Overvalued, DON‟T BUY!
•The bond‟ market price = RM700?
RM1,196 > RM700
Undervalued, BUY!

•The bond‟s market price = RM1,196?

RM1,196 = RM1,196
Fairly Valued, BUY/DON‟T BUY!
SEP2011-Q5(a)
OCTOBER 2012 – QUESTION 3

 c) The current market price of ABC bond is RM925. The

coupon of RM65 is paid annually. The bond has a par value
of RM1,000. If the bond has 8 years to mature and current
interest rate is 10 percent, would you buy the bond? Why?
(4 marks)

 d) A broker approaches you to buy two bonds, Bond LALA

and Bond LULU. Bond LALA has 5 percent, 15 years bond
and yield at 8 percent. While Bond LULU has 7 percent, 20
years bond and yield at 6 percent. Calculate the price of
both bonds.
(5 marks)
OCT2009-Q1(c&d)
(c) A 10-year bond pays interest of RM35 semi-annually, has a
par value of RM1,000 and is selling for RM737. You are
required to determine:
i) Coupon rate
ii) Current yield
(4m)

(d) A bond with a face value of RM1,000 and a coupon rate of

10% is selling for RM900. The issuer may call back the
bonds after 7 years at RM1,100. Determine the yield to call
on this bond.
(4m)
APRIL2011-Q1(a)

A 10 percent coupon bond with a par value of RM1,000

matures in 13 years. It is currently selling at RM920. despite
of that, the issuer may expect to call back the bond after 8
years at RM1,100. Determine the following:
i) Yield to Maturity (3m)
ii) Current Yield (2m)
iii) Yield to Call (4m)
iv) Would you pay RM920 for the bond if the required
rate of return for securities in the same asset class was
12 percent in which the interest is paid annually?
(5m)
OCT2010-Q1

Nisrina Berhad is interested to invest in bonds. Currently its

Financial Manager is evaluating bond A and Bond B. Bond A
pays 9% coupon semi-annually and matures in 12 years.
Bond B pays 7% coupon annually having a maturity period of
13 years.

i) Determine the value of each bond if the current market yield

for both bonds is 8%. (7m)
ii) Assume Bond A is currently selling at RM990 while Bond B is
selling at RM950. Which bond would Nisrina buy? Why?
(2m)
OCT2010-Q1

A 9.5%, 25-year bond issued 6 years ago is

currently priced in the market at RM980.

i) Determine the bond‟s yield-to-maturity (YTM)

(3m)
ii) If your required rate of return is 8%, will you buy this
bond? Why?
(2m)
APRIL2010-Q3(b)
 Given the following information of Bond MK Land and Bond YTL
Land: Bond MK Land Bond YTL Land
Coupon Rate 14% 12%
Term of coupon payment Annually Semi-annually
Maturity (years) 20 15
Market Price RM1,400 RM1,200

For each bond, calculate:

i) Coupon payment for each interest payment period. (3m)
ii) Current yield for each bond. (3m)
iii) iii) Value of bond if your required rate of return is 8
percent. Which bond would you invest to earn better
return? Justify your answer. (7m)
APR2009-Q3 (c)

i) The current yield (2m)

ii) The yield-to-maturity (3m)
APR2009-Q3 (d)

Two bonds have par values of RM1,000. Bond A is a

5 percent, 15-year bond priced to yield 8 percent.
Bond B is a 7 percent, 20-year bond priced to yield
7 percent. Which of these two has a lower price?
(Assume annual compounding in both cases). Show all
your calculations.
(5m)
FIN312 – MAC 2012 – Q4