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.
Want to read all 31 pages?