Most simply, bonds represent debt obligations – and therefore are a form of borrowing. If a company issues a bond, the money they receive in return is a loan, and must be repaid over time. Just like the mortgage on a home or a credit card payment, the repayment of the loan also entails periodic interest to be paid to the lenders. The buyers of bonds, then, are essentially lenders. For example, if you have ever bought a government savings bond, you became a lender to the federal government. Put differently, bonds are IOUs.

1. SOMETHING WHICH CAN HELP YOU TO MAKE
MONEY

3. FINANCIAL MARKET OVERVIEW

5. WHAT IS BOND ?

6. KEY FACTORS OF BOND ?
Maturity Last yeild
Previous
yeild
3 months 2.33%
2.33%
5 year 2.58% 2.64%
10 year 2.75% 2.79%
• BOND IS SECURED BY
COLLATERAL
• ISSUED BY FINANCIAL
INSTITUTIONS,CORPOR
ATION ETC.
• RISK FACTOR IS LOW
• PRIORITY AT
LIQUIDATION IS FIRST
• PAYEMENT STRUCTURE
IS ACCURED

7. HOW THE BOND LOOK LIKE

9. HOW BONDS WORK ?

10. IN MORE MODIFIED FORM

11. FEATURES OF BONDS
VAISHALI SINHA
ROLL NO. 58

12. Face/par value
• It is the amount that the issuer agrees to repay the
bondholder by maturity date.
• If its trades below its par value it is said to be trading at
discount and if it trades above its par value it is said to be
trading at premium.
• The face value of bonds should not be confused with the
price of the bond observed in the market.
• Majority of corporate bonds today carry a face value of
$1000.

13. Coupon rate
• It is also called the nominal rate .
• It is the interest rate that the issuer agrees to pay each year.
• The higher the coupon rate, the less the price will change in
response to a change in market interest rates.
• Maximum coupon rate is called Cap and minimum coupon rate is
called a Floor.
• Coupon rate increases when the reference rate increases and vice
versa.

14. Maturity
• Maturity is the date at which the bonds principle comes due and must be
repaid to lenders in full.
• Maturity for corporate bonds are typically in the range of one to five
years.
• Bond maturity is decided by the issuer.
• It influences the bonds yield i.e the longer the time to maturity the more
chances that a company has to fail to repay and therefore higher the
yield that it must carry.

15. Issuer
• The type and quality of the bond issuer is also an important
characteristic of a bond, as the issuer’s stability is your main
assurance of getting paid back in full.
• For ex. the US govt. is far more secure than anyone corporation.
• Its default risk is extremely small so small that the US govt.
securities are refer to as risk free assets.
• For corporate bonds there are fairly standardized bond rating
system. For ex. Blue chip firms have a higher rating.

16. Types Of Bonds
• Corporate Bonds
• Callable Bonds
• Term Bonds
• Adjustment Bonds
• Junk Bonds
• Emegring Markets
Bonds

17. Corporate Bonds
A company can issue bonds just as it can issue stock. Large corporations have a lot of
flexibility as to how much debt they can issue: the limit is whatever the market will bear.
Generally, a short-term corporate bond has a maturity of less than five years,
intermediate is five to 12 years and long term is more than 12 years.
Corporate bonds are characterized by higher yields because there is a higher risk of a
company defaulting than a government. The upside is that they can also be the most
rewarding fixed-income investments because of the risk the investor must take on. The
company's credit quality is very important: the higher the quality, the lower the interest
rate the investor receives.
Variations on corporate bonds include convertible bonds, which the holder can convert
into stock, and callable bonds, which allow the company to redeem an issue prior to
maturity.

18. Callable Bonds
Callable Bonds, also known as "redeemable bonds," can be redeemed by
the issuer prior to maturity. Usually a premium is paid to the bond owner
when the bond is called.
The main cause of a call is a decline in interest rates. If interest rates have
declined since a company first issued the bonds, it will likely want to
refinance this debt at a lower rate. In this case, the company will call its
current bonds and reissue new, lower-interest bonds to save money.

19. Term Bonds
Term Bonds are bonds from the same issue that share the same
maturity dates. Term bonds that have a call feature can be redeemed at
an earlier date than the other issued bonds. A call feature, or call
provision, is an agreement that bond issuers make with buyers. This
agreement is called an "indenture," which is the schedule and the price of
redemptions, plus the maturity dates.
Some corporate and municipal bonds are examples of term bonds that
have 10-year call features. This means the issuer of the bond can
redeem it at a predetermined price at specific times before the bond
matures.
A term bond is the opposite of a serial bond, which has various maturity
schedules at regular intervals until the issue is retired.

20. Adjustment Bonds
Issued by a corporation during a restructuring phase, an Adjustment Bonds is
given to the bondholders of an outstanding bond issue prior to the restructuring.
The debt obligation is consolidated and transferred from the outstanding bond
issue to the adjustment bond. This process is effectively a recapitalization of the
company's outstanding debt obligations, which is accomplished by adjusting the
terms (such as interest rates and lengths to maturity) to increase the likelihood
that the company will be able to meet its obligations.
If a company is near bankruptcy and requires protection from creditors (Chapter
11), it is likely unable to make payments on its debt obligations. If this is the
case, the company will be liquidated, and the company's value will be spread
among its creditors. However, creditors will generally only receive a fraction of
their original loans to the company. Creditors and the company will work
together to recapitalize debt obligations so that the company is able to meet its
obligations and continue operations, thus increasing the value that creditors will
receive.

21. Junk Bonds
A Junk Bonds, also known as a "high-yield bond" or "speculative
bond," is a bond rated "BB" or lower because of its high default risk. Junk
bonds typically offer interest rates three to four percentage points higher
than safer government issues.

22. Emerging Markets Bonds
Emerging markets bonds, issued by the Indian government, are issued
abroad as hard currency to raise capital for economic development in
third-world countries. What’s different about these bonds is that they are
usually issued in U.S. dollars or the euro, which can make them more
attractive to investors in those countries. Also making these EM bonds
attractive is the interest rate, which while high is typically paid by the
issuer. The risk comes in that countries like India have a lower credit
rating and the success of the bonds is tied to the success of the country’s
economic development.

29. INTRODUCTION
• Bond Valuation is a technique for determining the
theoretical fair value of a particular bond.
• Bond valuation includes calculating the :
a. Present value of the bond's future interest
payments. (cash flow)
b. the bond's value upon maturity. (face/par value)
• Because a bond's par value and interest payments are
fixed, an investor uses bond valuation to determine
what rate of return is required for a bond investment to
be worthwhile.

30. • The value of a bond determines whether it is a suitable
investment for a portfolio and hence, is an integral step in bond
investing.
• Bond valuation, in effect, is calculating the present value of a
bond’s expected future coupon payments. The theoretical fair
value of a bond is calculated by discounting the present value
of its coupon payments by an appropriate discount rate.
• The discount rate used is the yield to maturity, which is the rate
of return that an investor will get if s/he reinvested every
coupon payment from the bond at a fixed interest rate until the
bond matures. It takes into account the price of a bond, par
value, coupon rate, and time to maturity.

31. • For Example: let’s find the value of a corporate bond with annual
interest rate of 5%, making semi-annual interest payments for 2 years,
after which the bond matures and the principal must be repaid.
Assume a YTM of 3%.
• Solution: F = $1000 for corporate bond
Coupon rateannual = 5%, therefore, Coupon ratesemi-annual =
5%/2 = 2.5%
C = 2.5% x $1000 = $25 per period
t = 2 years x 2 = 4 periods for semi-annual coupon payments
T = 4 periods
• Present value of semi-annual payments
= 25/(1.03)1 + 25/(1.03)2 +25/(1.03)3 + 25/(1.03)4
= 24.27 + 23.56 + 22.88 + 22.21 = 92.93
• Present value of face value = 1000/(1.03)4 = 888.49
• Therefore, value of bond = $92.93 + $888.49 = $981.42

32. Zero-coupon bond valuation
• A zero-coupon bond makes no annual or semi-annual coupon
payments for the duration of the bond. Instead, it is sold at a deep
discount to par when issued. The difference between the purchase
price and par value is the investor’s interest earned on the bond. To
calculate the value of a zero-coupon, we only need to find the
present value of the face value.
• Following our example above, if the bond paid no coupons to
investors, its value will simply be:
$1000/(1.03)4 = $888.49
• Under both calculations, a coupon paying bond is more valuable
than a zero-coupon bond.