Bond Valuation

Week 7
Unit 7.3
 Key Points
01 The concept of bonds and related terms

02 Types of Bonds

03 The concept of coupon rate, YTM and YTC

04 The concept of valuation of bonds

 Bond Price (Present Value)
A 3-year bond with 10% coupon rate and Rs.1000 face
value has the yield to maturity of 8%. Assuming annual
coupon payment, calculate the price of the bond.

Data:
n = 3 years
CR = 10%
Face Value = 1000
YTM = 8%
Price = ?
 Bond Price (Present Value)
no. of years to maturity (n)
0 1 2 3

Pmt=> 100 100 100

PV
257.71
Discounting of all payments
Seems like Annuity??????
 Bond Price (Present Value)
no. of years (n)
0 1 2 3

Pmt=> 100 100 100

PV
257.71
+ Face Value = 1000
793.84
Discount using Interest Factor
1051.55
 Bond Price (Present Value)
Formula:
 1  (1  r )  n   1 
Price  PMT
 
  Face Value 
 (1  r ) n 

 r   

 1  (1  0.08) 3   1 

Price  100  
  1000 
 (1  0.08)3 

 0.08   
Price  257.71  793.84
Price  1051.55
A 10-year bond with 12.5% coupon rate and $1000 face value yield to
maturity is 14.5%. Assuming semiannual coupon payment, calculate
the price of the bond.
 

For Semiannual Payments:

n= 20 years
Coupon rate= 6.25%
YTM 7.25%

Price Pmt x ((1-(1+i)-n)/i) + Face Value (1+i)-n

Price= 62.5 x ((1-(1+0.0725)-20)/0.0725) + 1000 (1+0.0725)-20
Price 62.5 x 10.39 + 246.63
Pric 649.4375 + 246.63
Price $896.09
Suppose you offer zero coupon bond at $245 with a face value of $1,000 maturing in
twenty years. If the yield to maturity (YTM) on the bond is 8.00%, what will the
price of the bond after two years?

Price= Pmt x ((1-(1+i)-n)/i) + Face Value (1+i)-n

Price= 0 x ((1-(1+0.08)-18)/0.08) + 1000 (1+0.08)-18

Price= 0 x 9.37 + 250.25

Price= 0 + 250.25
Price= $250.25