a bond analysis (1)

8/8/2019 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

a bond analysis (1)

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