A Bond Analysis (1)
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Transcript of A Bond Analysis (1)
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Bond Analysis
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Bond Analysis
Bond Definition
A debt instrument issued for a period ofmore than one year with the purpose ofraising capital by borrowing.
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Bond Analysis
Bond Terminology Bond Par ValueA bond's par value is the maturity value of thebond. It is an amount that investors willreceive if they hold a bond to maturity. Bondpar value is also referred to as maturity value,face value, and principal amount.
Bond Market PriceThe market price of a bond is the current valuethe market places on a particular debt issue.
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Bond Analysis
Maturity Date
The maturity date of a bond is the date on
which the issuing company would pay theholder of the bond its par value.
callable bonds
There are certain bond features that allowthe issuing company to retire a bondbefore its maturity date. These are called
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Bond Analysis
Bond Coupon Rates
Bond coupon rate is also referred to as the
stated rate or the nominal rate of interest.
Current Bond Yield
A bond's current yield is simply a functionof the bond's current market price and thebond's coupon rate.
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Bond Analysis
Bond Yield to Maturity(YTM)
A bond's yield to maturity is a way that
investors can account for all of the possiblereturns they will get from a bond
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Bond Analysis
Types of Bonds
Premium BondsPremium bonds are government bonds that are
priced higher than their face value. Thesebonds are sold at a premium because the
interest rate paid on them is higher than theprevailing interest rates.
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Bond Analysis
Types of Bonds
convertible
are corporate bonds that can be convertedinto the common stock of the issuing companyat the behest of a bondholder. However, theconversion of a convertible bond is subject tocertain restrictions, depending on the policies
of the issuing authority.
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Bond Analysis
Types of Bonds
Discount Bonds
are those bonds which has been sold by a customerat a price below the face value of the same.Suppose, a bond has a par value of hundred USdollars. Now, if an investor sells this bond in themarket at a rate below the hundred dollar mark,
say US $ 50, then this bond would be regarded asthe Discount Bond. In such a case the bond wouldbe said to have been sold at a discount of fifty USdollars.
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Bond Analysis
zero coupon bond or Deep discountbonds
A bond which pays no coupons, is sold ata deep discount to its face value, andmatures at its face value.
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Bond Risk
Interest rate Risk
Default Risk
Marketability Risk
Call ability Risk
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Bond Risk
Interest rate risk
Variability in the return from the debtinstruments to investors is caused by thechanges in the market interest rate.
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Bond Risk
Default Risk
The failure to pay the agreed value of thedebt instrument by the issuer in full, ontime or both are the default risk.
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Bond Risk
Marketability Risk
Variation in return caused by the difficultyin selling the bonds quickly without havingto make a substantial price concession isknown as marketability.
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Bond Risk
Call-ability Risk
The uncertainty crated in the investorsreturn by the issuers ability to call thebond at any time is known as call-abilityrisk.
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The Time Value Concept
Concept of money is that the rupee
received today is more valuable than arupee received tomorrow.
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Future Value
The interest that the barrower pays tothe lender cause the money to have a
future vale different from its presentvalue.
Future Value= present value(1+int rate) t
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The Present Value
It is the measure of future returnstodays worth.
Present valuefuture value
= -----------------
(1+interest rate) t
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Bond Return
Holding Period Return
An investor buys a bond and sells it after
holding for a period.Price gain/loss during the holding period +
coupon rate
= -------------------------------------------------
current market price
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Bond Return
The current yield
The current yield is the coupon payment as
a percentage of current market price
Annual coupon payment
= --------------------------------
current market price
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Yield To Maturity (YTM)
It is a single discount factor that makespresent value of future cash flows from abond equal to the current price of the
bond.Assumptions
There should not be any default. The investor has to hold the bond till maturity
All the coupon payments should be reinvestedimmediately at same interest rate as the sameyield to maturity of the bond.
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YTM
c+(P or D/ years to maturity)
Y = ----------------------------------
(P0 + future value)/2
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YTM
Where:
Y= yield to maturity
C= coupon interest rate
P or D = premium or discount
P0 = present value
F = Face value
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Bond value theorems
Theorem I
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Bond value theorems
Theorem II
The bonds yield remains the same over its
life, the discount of premium depends onthe maturity period.
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Bond value theorems
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Bond value theorems
Theorem III
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Bond value theorems
Theorem IV
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Bond value theorems
Theorem V
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convexity
The quantum increase in the bond'sprice for a given decline in the yield is
higher than the decline in bonds pricefor a similar amount of increase inbonds yield. Hence the relationship isnot linear. this relation is referred as
convexity.
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convexity