BISMILLAH ASSALAM-O-ALIKUM and a very warm welcome to all of you

GROUP MEMBERS SARAH SHEIKH FAIZA FARHAT SHAMS-UN-NISA SAFIA NIAZ SAMRA KHALID AQSEEM ANJUM MBA 16

BOND VALUATION

FOCAL POINTS DEFINITION OF BOND CORE CONCEPTS TYPES FOREIGN CURRENCY BONDS

FOCAL POINTS BOND OPTIONS BOND & STOCK BONDS, BILLS & NOTES HOW BOND WORKS

FOCAL POINTS FACTORS AFFECTING PRICES BUYING BOND IN PAKISTAN DETERMINING BOND PRICES

FOCAL POINTS NUMERICAL RISK ASSOCIATED WITH BOND CURRENT MARKET SITUATION

BOND A promised stream of CFs. A bond is a formal contract to repay borrowed money with interest at fixed intervals.

BOND Bonds are debt instruments yielding a fixed rate of return over a set period of time that can be traded in the market like any other security.

BOND Technically in finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity.

CORE CONCEPTS Par/ Face Value Coupon Rate Coupon Payments Maturity Date

CORE CONCEPTS Original Maturity Remaining Maturity Call Date Call Price

CORE CONCEPTS Required Yield / Return Yield to Maturity Yield to Call

TYPES By Issuer By Pay Off

BY ISSUER Registered Bond / Bearer Bond Corporate Bond Government Bond / Sovereign Bond Municipal Bond

BY ISSUER Emerging Market Debt Agency Bond Lottery Bond

BY PAY OFF Callable Bond Convertible Bond Exchangeable Bond

BY PAY OFF Fixed Rate Bond Inflation-Indexed Bond Perpetual Bond

BY PAY OFF Zero-Coupon Bond Asset-backed securities Junk Bonds

BOND ISSUE IN FOREIGN CURRENCY Eurodollar bond Kangaroo bond Maple bond Samurai bond Yankee bond Shogun bond

BOND ISSUE IN FOREIGN CURRENCY Bulldog bond Arirang bond Kimchi bond Formosa bond Panda bond State of Israel bond

BOND OPTIONS Callable bond Convertible bond Embedded option Exchangeable bond Option-adjusted spread Puttable bond Z-spread

DIFFERENCE BETWEEN BONDS AND STOCKS Type of ownership Maturity

DIFFERENCE BETWEEN BONDS AND STOCKS Bonds and stocks are both securities, but the major difference between the two is that stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders).

DIFFERENCE BETWEEN BONDS AND STOCKS Bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity)

DIFFERENCE BETWEEN BONDS, BILLS AND NOTES All of these are marketable securities that are sold in order to pay off maturing debt, but we can differentiate on the basis of following:

DIFFERENCE BETWEEN BONDS, BILLS AND NOTES Payment of interest T-bills (Do Not Pay Interest Before Maturity) Notes (Till Maturity) Bonds (Till Maturity)

DIFFERENCE BETWEEN BONDS, BILLS AND NOTES Terms to maturity T-bills (less than one year) Notes (2,3,5 or 10-year terms) Bonds are long-term investments with terms of more than 10 years.

HOW BOND WORKS Very few investors hold bonds until maturity and instead trade them like shares. So, although they have a fixed price when they are issued, demand from investors can push the price above and below this level. This effectively increases or decreases the income you earn.

HOW BOND WORKS Bonds are issued in bundles of Rs.100 so if, for example, a company agrees to pay bondholders a set amount of Rs.10, the yield is 10%. If the bond is then traded in the open market and is sold for Rs.110, the income is still Rs.10 but the yield has dropped to 9%. If, however, demand for the bond is low and the price falls to Rs.90, the yield rises to 11%

WHAT INFLUENCES BOND PRICES Bond prices are influenced by the following factors: The yield they pay The rate of interest investors can earn elsewhere

WHAT INFLUENCES BOND PRICES Strength of the Individual Company Company’s Rating Future Demand.

WHAT INFLUENCES BOND PRICES Economic Conditions Anticipating Interest high interest rates on savings accounts

RELATIONSHIP BETWEEN REQUIRED YIELD AND PRICE This is the basis for understanding, valuing and managing bonds. Inverse relationship The price and yield of bond are inversely related

RELATIONSHIP BETWEEN REQUIRED YIELD AND PRICE Inverse price/yield relationship

RELATIONSHIP BETWEEN REQUIRED YIELD AND PRICE

When the coupon rate = the required yield price = par value. When the coupon rate < the required yield price < par value.

RELATIONSHIP BETWEEN REQUIRED YIELD AND PRICE When the coupon rate > the required yield price > par value. At maturity price = par value.

BUYING BONDS IN PAKISTAN Government Bonds - SBP Corporate Bond - Stock Broker Bond Funds

DETERMINATION OF BOND PRICES A bond’s price equals the sum of the present values (PV) of all future cash flows Coupon Principal Discounted at the required yield

NUMERICAL

RISK ASSOCIATED WITH INVESTING IN BONDS Interest rate risk duration Reinvestment rate risk Call risk Credit risk Unexpected inflation risk Liquidity risk

CURRENT MARKET SITUATION Currently in Pakistan two new bond are Launched namely: NIT Government Bond Fund (NIT-GBF) NIT Income Fund (NIT-IF)

CURRENT MARKET SITUATION Future Plans Support of SBP & SECP Performance of NIT Bonds

THANK YOU TEACHER’S COMMENT