VALUATION OF BONDS

Valuation


Value of financial securities = PV of expected future cash flows



To value bonds and stocks we need to:



Estimate future cash flows:
Size (how much) and
 Timing (when)




Discount future cash flows at an appropriate rate:


The rate should be appropriate to the risk presented by the security. Indian Debt Market


Consists of mainly two categories:
 the

government securities comprising central government and state government securities,
 the corporate bond market consists of financial institutions (FI) bonds, public sector units (PSU) bonds, and corporate bonds/debentures.


The government securities are the more dominant category of debt markets

Bonds


Bonds provide a fixed return to the holder



Bonds vs Debentures

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Types:
 Convertible

and Non convertible
 Coupon and Zero Coupon

Key Features of a Coupon Bond


Par value or Face value: Rs 1,000 or Rs 100 (usually)



Issue Price is generally equal to the par value








Market Price: After issue, the price of the bond in the market fluctuates according to changes in interest rates (the face value remains fixed)

Coupon interest rate: Stated interest rate. (Multiply by par value to get the interest amount)
Maturity: Years until bond must be repaid.
Maturity Value: generally same as the par value, but may be different, i.e. either higher or lower than par value

VALUE OF A BOND n P=Σ t=1 Ct
(1+r)t

+

Ct = Coupon Interest Amount
M = Maturity value (usually the Face value) r = return required by the bondholder n = number of years to maturity

M
(1+r)n

ILLUSTRATION




Compute the price of a 15-year, 12 percent coupon bond with a par value of 1,000. Let us assume that the required yield on this bond is 12 percent.
Lay down the