P/MAJ Felipe Omalza Yap, Jr.

Financial Management

Research Paper on “Bonds and Bonds Valuation”

Bonds are units of debt issued by companies or government that are converted into
tradable assets. Essentially, bonds are used to borrow money. Bonds are issued by public
authorities, credit institutions, companies and supranational institutions in the primary
markets. The most common process for issuing bonds is through underwriting. When a bond
issue is underwritten, one or more securities firms or banks, forming a syndicate, buy the entire
issue of bonds from the issuer and resell them to investors. Bonds can be added to investment
portfolios to gain stability because bonds are known to be safe investments. When someone
invests in bonds, a steady stream of income is available especially in times when stocks perform
poorly. Bonds are also a great way to protect savings especially in avoiding assets at risk. Bonds
have been around for thousands of years, dating back to as far as 2400 BC. Throughout the
centuries, both governments and companies used of bonds for crucial funding. The first
recorded bond in history dates back to 2400 B.C., a stone discovered at Nippur, in
Mesopotamia, now present-day Iraq, wherein the bond guaranteed the payment of grain by
the principal and the surety bond guaranteed reimbursement if the principal failed to make
payment. Corn was the currency of that period. The first ever government bond was issued by
the Bank of England in 1693 to raise money to fund a war against France. These first bonds
were a mix of both lottery and annuity.
Most bonds have five features when they are issued. These are issue size, issue date,
maturity date, maturity value, and coupon. However a sixth feature takes into account once
bonds are issued, which is yield to maturity. This becomes the most important figure for
estimating the total yield by the time the bond matures. The issue date is simply the date on
which a bond is issued and begins to accrue interest. The issue size of a bond offering is the
number of bonds issued multiplied by the face value. The maturity date is the date on which
you can expect to have your principal repaid. It is possible to buy and sell a bond in the open
market prior to its maturity date. Keep in mind that this changes the amount of money the
issuer will pay you as the bondholder based on the current market price of the bond. The
coupon rate is the periodic interest payment that the issuer makes during the life of the bond.
For instance, a bond with a $10,000 maturity value might offer a coupon of 5%. Then, you can
expect to receive $500 each year until the bond matures. The term “coupon” comes from the
days when investors would hold physical bond certificates with actual coupons; they would cut
them off and present them for payment. Yield to maturity is a calculated estimate of the total
amount of interest income a bond will yield over its lifetime. This is the value that most bond
investors worry about.
A bond is debt that is incurred by a company or government entity to finance a project
or fund operations. Investors effectively lend money to the borrower (the issuer of the bond) by
buying these debt instruments. The borrower pays an annual interest rate which can be fixed or
variable, depending on the structure of the bond. Every bond has a maturity date at which
point the principal amount is paid out to the bondholder, along with the final coupon payment.
A bond’s face value, or “par value,” is the amount an issuer pays to the bondholder once a bond
matures. The market price of a bond, which equals the “present value” of its expected future
cash flows, or payments to the bondholder, fluctuates depending on a number of factors,
including when the bond matures, the creditworthiness of the bond issuer, and the coupon rate
at the time of issuance compared with current rates. Depending on these factors, an investor
may end up purchasing a bond at par, below par, or above par.