Bond Valuation Coupon Rate Annual interest payment, as a percentage of face value. Bond Security, that obligates the issuer to make specified payments.

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Presentation transcript:

Bond Valuation Coupon Rate Annual interest payment, as a percentage of face value. Bond Security, that obligates the issuer to make specified payments to the bondholder, is a tool for raising long-term debt. Coupon The interest payments made to the bondholder. Face Value (Par Value or Maturity Value) Payment at the maturity of the bond. Discount Rate The interest rate that investors expected to earn on their bonds. The Value of A Security The Present Value of the cash flows it will pay to its owners

Typical Bond Model Price ( P or PV) r %= Discount Rate (yield) t Face Value (FV) Coupon Payments (A) Variations  Treasury Bonds  Zero- Coupon Bonds  Floating- Rate Bonds  Convertible Bonds  Callable Bonds

Valuing Bonds WARNING  The coupon rate IS NOT the discount rate used in the Present Value calculations.  The coupon rate merely tells us what cash flow the bond will produce. Since the coupon rate is listed as a %, this misconception is quite common.

Bond Prices and  Annual & Semi-annual Coupon Payments  Effects of Interest Rates  Yield to maturity vs current yield  Rate of return

effective interest rates it is mentioned the yearly effective interest rates ; in the case of semi-annual Coupon Payments supposing the cash gained from coupons is being invested in the same securities, If there are higher rates in other bonds or securirities; the cash from semi-annuals naturally will be allocated for these securities and so the new rates will be available in the market.

Bond Prices & Interest Rates If r > coupon rate PV is below of PAR VALUE If r < coupon rate PV is over of PAR VALUE

YIELDS Current Yield : PV of Cash Inflow Bond Price Yield to Maturity : PV of Cash Inflow = Bond Price The ratio of the Present Value of Cash Inflows to Bond Price Present Value of Cash Infows that makes equivalent it to Bond Price

Rate of Return Coupon Income + Price Change Rate of Return = Investment Total income per period per YTL invested

Risk Types  Default Risk The risk that a bond İssuer may default on its bonds  Interest Rate Risk The risk in bond prices due to fluctuations in interest rates  Liqudity Risk The risk that the bond could be easily converted to cash without a loss in value Term To Maturity Longer maturities offer higher annual yields Tax Status It is common to covert the bonds into an after tax form