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Business Finance(MGT 232)
Lecture 9
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Bond ValuationBond ValuationBond ValuationBond Valuation
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• What is a Bond?• Types of Bond• Characteristics of Bonds• Legal Aspects of Bonds• Bond Ratings
Overview of the Last Lecture
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Bond Valuation
• Value of any asset is the present value of future cash flows expected from it.
VB = INT [1- (1+rd)⁻ⁿ]+MV(1+rd)⁻ⁿ
rd
INT = Interest Payment (Interest rate x par value)rd = Market value of interestMV = Maturity ValueN = No of Years
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Bond Valuation• In 2000 PTCL issued a bond with par value of Rs.1000 at a
coupon interest rate of 10% for 30 years. If the going interest is 10% find the value of a bond in 2012?
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Bond Valuation
Bond at Par Value: If coupon rate = rd
VB = Fv
• Premium Bond: If coupon rate > rd
VB > Fv
• Discount Bond: If coupon rate <rd
VB < Fv
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Coupon Bond Example Bond C has a Rs. 1,000 face value and provides an 8% annual
coupon for 30 years. The appropriate discount rate is 10%. What is the value of the coupon bond?
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Zero Coupon Bond Bond Z has a Rs. 1,000 face value and a 30-year life. The
appropriate discount rate is 10%. What is the value of the zero-coupon bond?
VB = MV(1+rd)⁻ⁿ
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Bond Valuation with Semiannual Compounding
Bond C has a Rs. 1,000 face value and provides an 8% semiannual coupon for 15 years. The required rate of return is 10% (annual rate). What is the value of the bond?
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Bond YieldBond Yield
Investor
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firm
Bond YieldBond Yield
Investor
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FundsFunds
firm
Investor
Bond YieldBond Yield
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FundsFunds
BondsBonds
firm
Bond YieldBond Yield
Investor
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CashCash
BondsBonds
firm
Bond YieldBond Yield
Interest Payment
Investor
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Bond Yield
• Yield to Maturity
The return earned on bonds held till maturity is defined as YTM
• Yield to Call
The return earned on bonds held till called is defined as YTC
• It is used by investors to consider different bonds and expected return
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Summary
• Bond Valuation• Zero Coupon and Coupon bond valuation• Semiannual coupon bond valuation• Bond Yield• YTM• YTC