4-1 Business Finance (MGT 232) Lecture 9

4-2 Bond Valuation

4-3 What is a Bond? Types of Bond Characteristics of Bonds Legal Aspects of Bonds Bond Ratings Overview of the Last Lecture

4-4 Bond Valuation Value of any asset is the present value of future cash flows expected from it. V B =INT [1- (1+r d )⁻ⁿ]+MV(1+r d )⁻ⁿ r d INT = Interest Payment (Interest rate x par value) rd = Market value of interest MV = Maturity Value N = No of Years

4-5 Bond Valuation In 2000 PTCL issued a bond with par value of Rs.1000 at a coupon interest rate of 10% for 30 years. If the going interest is 10% find the value of a bond in 2012?

4-6 Bond Valuation Bond at Par Value: If coupon rate = rd VB = Fv Premium Bond: If coupon rate > rd VB > Fv Discount Bond: If coupon rate <rd VB < Fv

4-7 Coupon Bond Example Bond C has a Rs. 1,000 face value and provides an 8% annual coupon for 30 years. The appropriate discount rate is 10%. What is the value of the coupon bond?

4-8 Zero Coupon Bond Bond Z has a Rs. 1,000 face value and a 30-year life. The appropriate discount rate is 10%. What is the value of the zero-coupon bond? V B = MV(1+rd)⁻ⁿ

4-9 Bond Valuation with Semiannual Compounding Bond C has a Rs. 1,000 face value and provides an 8% semiannual coupon for 15 years. The required rate of return is 10% (annual rate). What is the value of the bond?

4-10 Bond Yield Investor

4-11 firm Bond Yield Investor

4-12 Funds firm Investor Bond Yield

4-13 Funds Bonds firm Bond Yield Investor

4-14 Cash Bonds firm Bond Yield Interest Payment Investor

4-15 Bond Yield Yield to Maturity The return earned on bonds held till maturity is defined as YTM Yield to Call The return earned on bonds held till called is defined as YTC It is used by investors to consider different bonds and expected return

4-16 Summary Bond Valuation Zero Coupon and Coupon bond valuation Semiannual coupon bond valuation Bond Yield YTM YTC