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
•

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- Fall '16
- anonymous
- Corporate Finance, Valuation