Business Finance

(MGT 232)

Lecture 9

4-1
Bond
Bond Valuation
Valuation

4-2
 Overview of the Last Lecture

• What is a Bond?
• Types of Bond
• Characteristics of Bonds
• Legal Aspects of Bonds
• Bond Ratings

4-3
 Bond Valuation
• Value of any asset is the present value of future cash flows
expected from it.
VB = INT [1- (1+rd)⁻ⁿ]+MV(1+rd)⁻ⁿ
rd
INT = Interest Payment (Interest rate x par value)
rd = Market value of interest
MV = Maturity Value
N = No of Years

4-4
 Bond Valuation
• In 2000 PTCL issued a bond with par value of Rs.1000 at a
coupon interest rate of 10% for 30 years. If the going interest
is 10% find the value of a bond in 2012?

4-5
 Bond Valuation
Bond at Par Value:
If coupon rate = rd
VB = Fv

• Premium Bond:
If coupon rate > rd
VB > Fv

• Discount Bond:
If coupon rate <rd
VB < Fv

4-6
 Coupon Bond Example
Bond C has a Rs. 1,000 face value and provides an 8% annual
coupon for 30 years. The appropriate discount rate is 10%.
What is the value of the coupon bond?

4-7
 Zero Coupon Bond
Bond Z has a Rs. 1,000 face value and a 30-year life. The
appropriate discount rate is 10%. What is the value of the
zero-coupon bond?
VB = MV(1+rd)⁻ⁿ

4-8
Bond Valuation with Semiannual Compounding

Bond C has a Rs. 1,000 face value and provides an 8%

semiannual coupon for 15 years. The required rate of return
is 10% (annual rate). What is the value of the bond?

4-9
 Bond Yield

Investor
4-10
 Bond Yield

firm

Investor 4-11
 Bond Yield

Funds

firm

Investor 4-12
 Bond Yield

Funds

firm

Investor Bonds 4-13

 Bond Yield

Cash

firm
Interest Payment

Investor Bonds 4-14

 Bond Yield

• Yield to Maturity
The return earned on bonds held till maturity is defined as YTM

• Yield to Call
The return earned on bonds held till called is defined as YTC

• It is used by investors to consider different bonds and

expected return

4-15
 Summary
• Bond Valuation
• Zero Coupon and Coupon bond valuation
• Semiannual coupon bond valuation
• Bond Yield
• YTM
• YTC

4-16