Bond Valuation

Week 7
Unit 7.4
 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

 Current Yield
Current Yield (CY):Present return on the basis of coupon
payment and current price of bond.

Current yield (CY)= Annual coupon payment/ current price

 YTM and YTC
Yield to Maturity (YTM): Investors required return on bond
trading in the secondary market (return investor
received if he holds bond till maturity).

Yield to Call (YTC): Investors required return on callable bonds

 Current Yield
Find the current yield for a 10-year, 9% annual coupon bond that
sells for $887, and has a face value of $1,000.
Current yield = $90 / $887
= 0.1015 = 10.15%
 Interest Payment (Pmt)

A 5-year bond with a coupon rate of 4% has a face value of

Rs.1,000. What is the annual interest payment?

Formula: Pmt = Face Value x CR

Pmt = 1000 x 4%
Pmt = 40
A 6 year bond with 1000 Rupees face value pays 80 Rupees
interest annually and sells for 950 Rupees. What is the coupon
rate, current yield and yield to maturity?
For Coupon rate:
Pmt= Face Value x Coupon rate
Coupon rate= Pmt/ Face Value
Coupon rate= 80 / 1000
Coupon rate= 8%

For Current yield:

Current yield= Pmt/ Price
Current yield= 80 / 950
Current yield= 8.42%
 
Price= Pmt x ((1-(1+YTM)-n)/YTM) + Face Value (1+YTM)-n
950= 80 x ((1-(1+YTM)-6)/YTM) + 1000 (1+YTM)-6
Using Trial & Error method
YTM= 7.31%
Approximated YTM
Where:
C – Interest/coupon payment
FV – face value of the security
PV – Present value/price of the security
t – How many years it takes the security to reach maturity
 YTM: Yield To Maturity
•   =
YTM
YTM =
YTM =
YTM =12.63%
  
 YTC: Yield to Call
•  
Callable at callable after 3 years at 5% premium
YTC =
YTC =
YTC =
YTC = 15.38%