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Bond Valuation

The document discusses bond valuation including defining key terms like face value, coupon rate, maturity date, and yield to maturity. It explains how bond prices and market interest rates move inversely, with premium bonds having coupon rates below the yield to maturity and discount bonds having coupon rates above the yield to maturity. Sample bond valuation exercises are also included.

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Mohamed Esam
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22 views7 pages

Bond Valuation

The document discusses bond valuation including defining key terms like face value, coupon rate, maturity date, and yield to maturity. It explains how bond prices and market interest rates move inversely, with premium bonds having coupon rates below the yield to maturity and discount bonds having coupon rates above the yield to maturity. Sample bond valuation exercises are also included.

Uploaded by

Mohamed Esam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Tutorial 5

Bond Valuation
What is a Bond ?

A bond is a debt instrument that provides a periodic stream of interest


payments to investors while repaying the principal sum on a specified
maturity date.

Bond Features and prices:


Face (par)value
Coupon rate
Coupons
Maturity
Yield to maturity ( bond yield)
Par Value(Face Value)
It is the stated face value of the bond. Generally represents the amount of money
the firm borrows and promises to repay on the maturity date.

Coupon Rate
The periodic interest payments promised to bond holders are computed as a fixed
percentage of the bond’s face value; this percentage is known as the coupon rate.

Coupons
A bond’s coupon is the dollar value of the periodic interest payment promised to
bondholders; this equals the coupon rate times the face value of the bond.

• For example, if a bond issuer promises to pay an annual coupon rate of 5% to bon
d holders and the face value of the bond is $1,000, the bond holders are being pro
mised a coupon payment of (0.05)($1,000) = $50 per year.

Maturity
Date on which the principle amount of a bond is paid.
The number of years until the face value is paid is called the bond’s time to maturity
.
Yield to Maturity

The yield to maturity (YTM) is the percentage rate of return for a bond a
ssuming that the investor holds the asset until its maturity date. It is t
he sum of all of its remaining coupon payments. A bond's yield to maturity
rises or falls depending on its market value

1. Bond prices and market interest rates move in opposite directions.

• When interest rates rise, a bond’s value will decline. Similarly when interest rate
fall , bond value rise

2. When coupon rate = YTM, price = par value.


When coupon rate > YTM, price > par value (premium bond)
When coupon rate < YTM, price < par value (discount bond)
If the market interest rate rises above the coupon rate
§ The existing bond would star providing lower return

§ Thus becoming unattractive


§ Thus the price of the bond would fall below its face value. The
bond would start selling at a discount

If the market interest rate falls below the coupon rate


§ The existing bonds would start providing relatively higher return
§ Thus becoming very attractive
§ Thus the price of the bond would rise its face value. The bond
would start selling at a premium
EXERCISES
1- What is the price of a 4 year coupon bond with a face value of $1000 and a
coupon rate of 5%. Assume the coupon payments are made annually and that the
yield to maturity is 6%

2-The $1,000 face value ABC bond has a coupon rate of 6%, with interest paid
semi-annually, and matures in 5 years. If the bond is priced to yield 8%, what is the bo
nd's value today?

3-Suppose the Xanth Co. Were to issue a bond with 10years to maturity with a
par value of $1000 and has annual coupon of $80, similar bonds has yield to maturity
of 8%. Calculate the total bond value.

4- The KLM bond has a 8% coupon rate (with interest paid semi-annually), a maturity v
alue of $1,000, and matures in 5 years. If the bond is priced to yield 6%, what is the bo
nd's current price?
Thank you
Any Questions?

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