Bond Valuation, Bond Types, Bond Characteristics, Reasons for issuing Bonds, Bond Risks, Bond Measuring Yield, Bond Pricing Theorems, Factors that Influence Bond Prices, Primary Bond Market, Secondary Bond Market, Bonds in Nepal.

1. BONDKathmandu University School of Management (KUSOM)
Subject: Financial Decisions
Term/Trimester: MBA Second Term
Year: 2017
Group Members:
Bijay Chalise I Dipesh Raj Pandey I Swarna Maharjan
Valuation

2. BOND
• Long term promissory note
• Make annual interest payments
• Repay Mature value in maturity period

3. BOND VALUATION
• Determining the fair value of a particular bond
• Determined by discounting its expected cash flows at the
appropriate discount rate

4. • Treasury bonds
• Corporate bonds
• Municipal bonds
• Foreign bonds
BOND Types

5. • Par Value
• Coupon Interest Rate
• Maturity Date
• Provisions to call or Redeem Bonds
• Sinking Funds
• Convertible
BOND Characteristics

6. • Reduce the cost of capital
• Tax saving
• Diversify the source of funds
• Preserve and control
Reasons for Issuing BONDS

7. • Interest rate risk
• Default risk
• Marketability risk
• Callability risk
• Reinvestment risk
BOND Risks

8. • Current Yield
• Yield to Maturity
• Yield to Call
• Realized Yield To Maturity
BOND Measuring Yield

9. • Theorem 1
Bond prices move inversely to interest rate changes.
When y  P
When y  P
• Theorem 2
The longest the maturity of the bond, the more sensitive it
is to changes in interest rates.
BOND Pricing Theorems

10. • Theorem 3
The price changes resulting from equal absolute increases in
YTM are not symmetrical
• Theorem 4
The lower a bond’s coupon, the more sensitive its price will
be to given changes in interest rates.
BOND Pricing Theorems

11. Factors that Influence Bond Prices
• Change in Interest Rates
• Bond Coupon Rate
• Bond Maturity
• Bond Credit Rating (If the bond’s credit rating is lowered, the value of
bond will decline and its yield increases. Alternatively if the credit
rating is raised, the value of bond will rise and yield declines.)

12. Primary Bond Market
• The investment banks then sell the bonds to large institutional
investors (who make up the bulk of bond buyers) through an initial
offering. These bonds are issued by the company at offering price that
is uniform for all investors.

13. Primary Bond Market
• Government bonds, including municipal bonds, generally have lower
yields, but also have less risk and more task advantages than
corporate bonds. Government bonds are much less complex
investments, perfect for a beginning bond investor.

14. Secondary Bond Market
• Bonds are traded over the counter (OTC). OTC market is a
decentralized market without a central physical location, where
market participants trade with one another through various
communication modes such as the telephone, email and proprietary
electronic trading systems. In an OTC market, dealers act as market
makers by quoting prices at which they will buy and sell a security or
currency.

15. Why are most bonds traded on the secondary
market "over the counter"?
• Stock prices are affected by news events, the P/E ratio of a company and,
ultimately, the demand and supply of shares, which are reflected in the daily
stock price.

16. Why are most bonds traded on the secondary
market "over the counter"?
• On the other hand, bond prices are affected by changing interest rates and credit
ratings. Since trade time between issues can last weeks or even months, it is
difficult to list current prices for a particular bond issue, which makes it difficult to
trade bonds on the stock market.

17. How NRB issues bonds on behalf of
Government
• Competitive Tender and Non-Competitive Tender
• The competitive bidding is open for banking institutions and non-
banking institutions.
• But the non-competitive bidding is meant only for non-banking
institutions.
• NRB also issues Citizen Saving Bonds targeted at general public that
offer a fixed rate of return.

18. BOND IN Nepal
• Government issued bond in 1964
• 6 percent rate of interest and maturity period of 5 years
• Largely concentrated in the government bonds
• Development Bond (DB)
• Citizen Saving Bond
• Foreign Bond
• Special Bond
• National Saving Bond

19. S.No Name Quantity Paid Up Value Amount
1 Bikas Rinpatra 2072 75,00,000 100 7,50,000
2 Bikas Rinpatra 2075 1,20,00,000 100 12,00,000
3 Bikas Rinpatra 2075 'ka' 2,10,00,000 100 21,00,000
4 Bikas Rinpatra 2076 22,00,00,00 100 22,00,000
5 Bikas Rinpatra 2076 "ka" 90,00,000 100 9,00,000
6 Bikas Rinpatra 2076 "Ga" 46,00,000 100 4,60,000
7 Bikas Rinpatra 2076 "kha" 1,04,00,000 100 10,40,000
8 Bikas Rinpatra 2072 "ka" 1,50,00,000 100 15,00,000
9 Bikas Rinpatra 2071 "ka" 2,00,00,000 100 20,00,000
10 Bikas Rinpatra 2071 "Kha" 3,00,00,000 100 30,00,000
11 Bikas Rinpatra 2073 "Ka" 2,75,00,000 100 27,50,000
12 Bikash Rinpatra 2069 1,50,00,000 100 15,00,000
13 Bikas Rinpatra 2072 "kha" 2,55,00,000 100 25,50,000
14 BIKAS RINPATRA 2072 "GA" 4,99,09,000 100 49,90,900
15 BIKAS RINPATRA 2072 "GHA" 3,00,00,000 100 30,00,000
16 BIKAS RINPATRA 2071 "GA" 5,00,00,000 100 50,00,000
17 Bikas Rinpatra 2070 "Ka" 3,50,00,000 100 35,00,000
18 BIKAS RINPATRA 2071 "GHA" 6,50,00,000 100 65,00,000
Total 44,94,09,000 44,94,09,00,000
BOND IN Nepal
Government Bonds

20. BOND IN Nepal
• Proposed and issued - treasury bills and other long term government
bonds(2068/2069 B.S)
TB DB CSB Foreign
Bond
National
Saving
Total
Proposed Amount 16 14 1.41 1.00 5.00 37.41
Issued Amount 17.283425 14 0.126566 .00866 5.00 36.418651
Issued % 108.02% 100% 8.98% 0.866% 100% 97.35%

21. BOND IN Nepal
• Total Government Bonds and Treasury Bills (2069 B.S.)
S.N. Bonds Amount (billion) Percentage
1 Treasury Bills 131.624107 63.8215
2 Development Bonds 57.519400 27.8898
3 Citizen Savings Bonds 4.1231 2.3029
4 National Savings Bonds 15.680000 5.9058
5 Special Bonds 0.157600 0.0764
6 Foreign Emp. Bonds 0.016040 0.0036
Total 209.1202 100.00

22. BOND IN Nepal
Corporate Bonds• Bank of Kathmandu Rinpatra 2069
• Everest Bank LTD Rinpatra 2061
• Himalayan Bank LTD Rinpatra 2072
• Kumari Bank LTD BOND 2070
• Laxmi Bank LTD Debenture 2072
• Nabil Bank LTD Bond 2075
• Nepal Bidhut Pradhikaran Rinpatra 2069
• Nepal Investment Bank LTD Bond 2067… etc

23. BOND IN Nepal
Corporate Bonds
Sno. Particular Rate Amount Value Total Amount
1 Laxmi Bank Debenture – 2072 8.5 2500 1000 25,00,000
2 Nabil Bank Debenture – 2075 8.5 100 1000 1,00,000
3 % Laxmi Bank Debenture – 2076 8 20,000 1000 2,00,00,000
4 Global IME Bank Debenture - 2076 10 24,000 1000 2,40,00,000

24. BOND IN Nepal
0
1
2
3
4
5
6
7
8
9
10
0 2 4 6 8 10 12 14
YTM%
Time to maturity
Gov. development bond Yeild curve
Series1
Fitted Value

25. BOND IN Nepal
0%
2%
4%
6%
8%
10%
12%
14%
0 2 4 6 8 10
YTM
Time to maturity
Corporate bond Yield curve 2012
Interest rate
Fitted values

26. BOND IN Nepal
9.50
9 9.00 9.00
8
7.5
9
8.00% 8% 8%
11%
6%
8%
10%
8.50%
12.50%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
7.00
9.00
11.00
1 2 3 4 5 6 7 8 9
Credit spread chart
GD bond rate Corporate bond rate