Professional Documents
Culture Documents
(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
4-9
Bond Yield
Investor
4-10
Bond Yield
firm
Investor 4-11
Bond Yield
Funds
firm
Investor 4-12
Bond Yield
Funds
firm
Cash
firm
Interest Payment
• 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
4-15
Summary
• Bond Valuation
• Zero Coupon and Coupon bond valuation
• Semiannual coupon bond valuation
• Bond Yield
• YTM
• YTC
4-16