1 PEMBELANJAAN PERUSAHAAN LECTURE 7a – VALUATION ON DEBT / BOND

PP/MB-IPB/10 2 Basic Valuation Model V 0 = CF 1 + CF 2 + … + CF n (1 + k) 1 (1 + k) 2 (1 + k) n Where: V 0 = value of the asset at time zero CF t = cash flow expected at the end of year t k = appropriate required return (discount rate) n = relevant time period

PP/MB-IPB/10 3 What is a Bond? A bond is a long-term debt instrument that pays the bondholder a specified amount of periodic interest over a specified period of time. (note that a bond = debt)

PP/MB-IPB/10 4 General Features of Debt Instruments The bond’s principal is the amount borrowed by the company and the amount owed to the bond holder on the maturity date. The bond’s maturity date is the time at which a bond becomes due and the principal must be repaid. The bond’s coupon rate is the specified interest rate (or $ amount) that must be periodically paid.

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