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Business Finance (MGT 232)

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Presentation on theme: "Business Finance (MGT 232)"— Presentation transcript:

1 Business Finance (MGT 232)
Lecture 8

2 Bond Valuation

3 Overview of the Last Lecture
Impact of Frequency in PV and PVA Finding i and n in TMV problems Amortizing a Loan Loan Amortization Schedule

4 Bond Valuation What is a Bond? Types of Bond Characteristics of Bonds
Legal Aspects of Bonds Bond Ratings Bond Valuation Yield on Bonds Yield to maturity Yield to Call Current Yield

5 Bonds A bond is a long-term debt instrument issued by a corporation or government. A bond is a Long term contract under which borrowers agrees to make payments of interest and principal on specific dates to the bond holder.

6 Types of Bonds Treasury Bonds : Bonds issued by the government
No default risk Corporate Bonds: Bonds issued by the corporations Exposed to default risk Municipal Bonds: Issued by state or local government It has default risk and low interest rate Foreign Bonds: Default risk is involved Currency risk

7 Characteristics of Bonds
The bond’s coupon rate is the stated rate of interest. The maturity value (MV) [Par value or face value] of a bond is the stated value. It represents the amount of money the firm borrows or promises to repay on maturity date The discount rate (required rate of return) is dependent on the risk of the bond and is composed of the risk-free rate plus a premium for risk.

8 Characteristics of Bonds
Maturity date - Bonds have specified maturity date on which the par value be repaid Provisions to Call (or redeem bonds) – Call Price Call premium Deferred call and Call protection Call redemtion Convertible Bonds Bonds with purchase warrants Income Bonds

9 Different Types of Bonds
A non-zero coupon-paying bond is a coupon-paying bond with a finite life. A zero-coupon bond is a bond that pays no interest but sells at a deep discount from its face value.

10 Legal Aspects of Bonds Indenture Trustee

11 Bond Ratings Bonds are given ratings to reflect their probability of going into default. RATING IMPORTANCE AAA AA A BBB Investment grade bonds (high quality bonds, less risk) BB CCC CC C Speculative bonds (high risk , low cost) D In default

12 Bond Ratings Ratings effects the stability and cost
International credit rating agencies: Moody’s International Standards and Poors Inc. CRA in Pakistan: PACRA JCR-VIS

13 Summary What is a Bond? Types of Bond Characteristics of Bonds
Legal Aspects of Bonds Bond Ratings

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