Professional Documents
Culture Documents
Valuing Bonds
• Bonds, like the world suggests, binds the borrow to the lender in a contract.
• An explicit IOU (I owe you): a promise (a legal tender) to pay money in the future
in return for the money borrowed.
• Key Bond Characteristics
• Face Value: The face value (also known as the par value) of a bond is the price
at which the bond is sold to investors when first issued (most of time); it is also
the price at which the bond is redeemed at maturity. It can be called principal
amount on which the interest will be due.
• Coupon Rate: The periodic interest payments promised to bond holders are
computed as a fixed percentage of the bond’s face value; this percentage is
known as the coupon rate.
• Maturity: A bond’s maturity is the length of time until the principal is
scheduled to be repaid.
Yogesh Chauhan, IIM Raipur
Indian bond market
Weighted Weighted Total Trade Last Trade Last Trade
Average No. of Yield
ISIN Descriptor Average Value Price
Price (Rs.) Yield Trades ( in lacs) (in ) (Annualized)
(YTM) (%) (%)
HOUSING
DEVELOPMENT
FINANCE
INE001A07SG6 100.0348 7.3250 2 5000.00 100.1350 7.3000
CORPORATION LTD
SR W-008 7.35 NCD
10FB25 FVRS10LAC
LIC HOUSING
FINANCE LIMITED
INE115A07OQ2 396 7.45 NCD 100.0117 7.4245 5 27500.00 100.0728 7.4000
10FB23 FVRS10LAC
LOAUPTO25FB20
HDB FINANCIAL
SERVICES LIMITED SR
INE756I07CX7 A/1/(FX)146 7.50 100.0272 7.4600 2 13500.00 100.0272 7.4600
NCD 23DC22
FVRS10LAC
INDIAN RAILWAY
FINANCE
CORPORATION
INE053F07728 LIMITED SR-96 8.63 121.8673 5.4773 4 220.00 121.9223 5.4700
BD 26MR29
FVRS1000 LOA UPTO
25MR14
STATE BANK OF
INDIA SERIES II BD Yogesh Chauhan, IIM Raipur
INE062A08181 100.7795 9.0793 3 1150.00 100.9462 9.0250
9.37 PERPETUAL
FVRS10LAC
Indian Bond market
ISIN INE001A07SG6
Security Description HOUSING DEVELOPMENT FINANCE CORPORATION LTD SR W-008 7.35 NCD 10FB25 FVRS10LAC
• HDFC bank bond with coupon rate is 7.35% for 5 years maturity. The credit rating is
AAA
• What should be the value of the bond?
0 1 2 3 4 5
=Rs 7.35 =Rs 7.35 =Rs 7.35 =Rs. 7.35 =Rs 7.35 (coupon payment)
=Rs 100 (Redemption value
++
Rating Meanings
AAA Highest degree of safety
AA High degree of safety
A Adequate degree of safety
BBB Moderate degree of safety
BB Moderate risk of default
B High risk of default
C Very high risk of default
D Default or expected to be in default soon
140.00
130.00
120.00
110.00
Bond price
100.00
90.00
80.00
70.00
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13%
Interest rate
Bond price
Yogesh Chauhan, IIM Raipur
Bond yield
• Bond yields are a measure of the expected profit you will make from
your bond investment.
• Yield-to-maturity (YTM): the return of the bond if you hold it till maturity. The return
build-into the pricing of a bond is called yield-to-maturity.
• It may be defined as the compounded rate of return (IRR) an investor is expected to
receive from a bond purchased at the current market price and held to maturity
• +
++
YTM=7.59%
• I expect from the bond, but it is offering 6.0824%. Therefore, I will buy it.
Yogesh Chauhan, IIM Raipur
Yield misconception
MOODY'S MATURITY
ISSUER CURRENCY COUPON YIELD BID ASK
RATING DATE
Amazon.com Inc. USD 3.8750% 29.68% 8/22/2037 14.00 38.00
Argentinien, Republik USD 7.6250% 21.84% 4/18/2037 37.15 41.72
Argentinien, Republik USD 7.1250% 21.35% 6/28/2117 34.95 45.42
Bank of New York Mellon [ EUR 3.8590% 294.06% 12/30/2099 3.55 6.55
Luxembourg] S.A., The
Ecuador, Republik USD 10.0000% 25.96% 8/15/2030 44.13 51.68
Frontier Communications C USD 9.0000% 24.12% Caa3 8/15/2031 41.88 45.28
orp.
Great Hall Mortgages No.1 EUR - 25.45% Aa3 3/18/2039 - -
PLC
HYPO TIROL BANK AG EUR - 25.37% A2 3/28/2043 - -
J.C. Penney Co. Inc. USD 7.4000% 23.75% Caa3 4/1/2037 32.99 37.89
J.C. Penney Corp. Inc. USD 6.3750% 21.76% Caa3 10/15/2036 34.29 34.30
Mexiko, Vereinigte Staaten EUR 8.0000% 162.93% A3 11/7/2047 4.91 5.31
Noble Holding Internationa USD 6.2000% 20.35% Caa3 8/1/2040 32.08 35.35
l Ltd.
Yogesh Chauhan, IIM Raipur
Yield curve
Bond A 0 Year 1
=Rs 1000
Bond B 0
Year 10
=Rs 1000
Reinvestment rate
5% 10% 15%
Reinvestment payment Rs. 1.53 Rs. 3.10 Rs. 4.72
Coupon payment Rs. 30 Rs. 30 Rs. 30
Principal payment Rs. 100 Rs. 100 Rs. 100
Total return Rs. 131.53 Rs. 133.10 Rs. 134.73
Investment (Market price) Rs. 100 Rs. 100 Rs. 100
Yield(%) 9.56% 10.00% 10.45%
https://www.nseindia.com/market-data/bonds-traded-in-capital-market
• If bond market price increases (decreases), its yield must decrease (increases)
• Bond Price Variability is directly related to the term to maturity.
• For the given change in the level of market interest rate, the change in bond
prices is greater for long term maturity.
• The percentage change in a bond’s price owing to change in its yield will be
smaller if the coupon rate is higher.
• The price-yield relation is convex
• A decrease in a bonds yield will rise the bonds price by an amount that is
greater in size than the corresponding fall in the bonds price that would occur
if there where an equal sized increase in the bonds yield.