Valuation of Bonds Basics

1. Bonds Valuation
Dr. Mital Bhayani

2. Introduction
 Bonds price = PV of all future cash flows at the market discount
rate.
Market discount rate is required rate if return given the risk of bond.
 Coupon rate > Market discount rate=Premium
 Coupon rate < Market discount rate =Discount
 Coupon rate = Market discount rate =Par
 “Yield to Maturity is the internal rate of return(IRR) on the cash
flows- such a uniform rate which equalized the PV of all the future
cash flows with price of bond. It is the implied market discount
rate.”
 Assumption:
1. Investor holds till maturity
2. Issuers keeps all the promises
3. Investors reinvests at YTM rate
Dr. Mital Bhayani

3. Basic of Bonds valuation
Dr. Mital Bhayani

4. Market value of a bond is Present value of future
cash flows discounted at:
- Current YTM (Valuation Method A)
- Series of spot rates (Valuation Method B)
- Series of forward rates
- Combination of spot and forward rates
Dr. Mital Bhayani

5. Example for Bonds Valuation
Dr. Mital Bhayani

6. Method B: Using Spot rates series
Dr. Mital Bhayani

7. Method A: Using YTM
Dr. Mital Bhayani

8. Calculate Bonds Price :
Calculate PV of future cash flows discounted at
market rate ( RRR)
Ex: A 5 years bond has annual coupon payment
is 5% and RRR( Required rate of return is 6%)
and Par value is 100.
Dr. Mital Bhayani

9. Thank You!!!
Dr. Mital Bhayani