Bond valuation
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Bond valuation

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Bond valuation Bond valuation Presentation Transcript

  • BOND !!!
    • Coupon = income over holding period
    • Term to maturity = number of years to expire
    • Usually issuers agree to pay fixed interest on every six months and principal at the date of maturity
    • MONEY MARKET when maturity less than 1 year, NOTES when above 1year but less than 10 years, BONDS when maturities excess 10 years
    HPR= holding period return HPY= holding period yield
  • TAX effect
    i= coupon rate
    T= tax rate
    If i is 5% and tax rate is 20% then equivalent taxable yield (ETY) ?
  • 8% coupon bond, matures in 20 years with par value of $1000.
    YTM is 10%.
    What is coupon?
    YTM?
    Value of Bond?
  • If YTM changes to 6%?
  • If yield <coupon rate then , bond will be priced at a premium
    If yield> coupon rate then, bond will be priced at a discount
    Price-yield relationship is convex
  • Yield is determining factor
    Nominal yield = a bond with 8% coupon has 8% nominal yield
    Current yield
    i is expected or promised yield. Pm is current market price and promised price.
  • The annual interest is Rs 60 on the current investment of Rs 883.40. Therefore, the current rate of return or the current yield is: 60/883.40 = 6.8 per cent.
    REASON of changing Yield?
    • Liquidity
    • Expectation
    • Volatility of interest rate
  • The value of the bond declines as the market interest rate (discount rate) increases.