Bond valuation

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Bond valuation

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

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