PPT_Valuation of Securities.pptx - Valuation of Securities Bond Characteristics \u2022 A Bond is described in terms of \u2022 Par value \u2022 Coupon rate \u2022

# PPT_Valuation of Securities.pptx - Valuation of Securities...

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Valuation of Securities Bond Characteristics A Bond is described in terms of: Par value Coupon rate Maturity date Present Value of Bond C C C M P = + + …. + (1+ r ) (1+ r ) 2 (1+ r ) n (1+ r ) n Bond Pricing (Valuation) n C M P = + t =1 (1+ r ) t (1+ r ) n 2 n C /2 M P = + t =1 (1+ r /2) t (1+ r /2) 2 n Bond Pricing A Rs.100 face value bond carries a coupon rate of 12 percent p.a. payable semi-annually. The bond is redeemable at par after 5 years. If investors require a return of 10% p.a, what will be the price of the bond? Example Compute the price of a bond, consider a 10-year, 12 percent coupon bond with a par value of 1,000. Let us assume that the required yield on this bond is 13 percent. Coupon Rate, Required Yield, & Price To sum up, the relationship between the coupon rate, the required yield, and the price is as follows: Coupon rate > Required yield Price > Par (Premium bond) Coupon rate = Required yield Price = Par Coupon rate < Required yield Price < Par (Discount bond) Price-Yield Relationship Price Yield Price changes with time Value of Bond Premium Bond: r d = 11% A PAR VALUE BOND: r d = 13% B Discount Bond: r d = 15% 8 7 6 5 4 3 2 1 0 YEARS TO MATURITY Bonds: Return & Prices Current Yield Yield to Maturity(YTM) Yield to Call Current Yield  #### You've reached the end of your free preview.

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• Fall '16
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