Lecture 03: Applying the Time Value of Money to Security Valuation – Valuation of Bonds and Debt Securities

A bond or a debenture is a long term debt instrument carrying a fixed rate of interest which is known to investors. A bond is redeemable after a specified period. Bonds are also called gilt edged securities or gilt when issued by the government since it is free of default risk.

Features of a Bond or Debenture
• Face Value – Face value is called par value. A bond / debenture is generally issued at a par value and interest is paid on the par value. • Interest Rate – Interest rate is fixed and known to the bondholders / debenture holders. Interest paid on a bond is tax deductible. The interest rate is also called the coupon rate. • Maturity – A bond is issued for a specified period of time. It is repaid on maturity. • Redemption Value – The value which a bondholder will get on maturity is called redemption value. • Market Value – A bond / debenture may be traded on the stock exchange. The price at which it is currently sold or bought is called the market value of the bond / debenture.

A bond is a long-term promissory note that promises to pay the bondholder a predetermined, fixed amount of interest each year until maturity. At maturity, the principal will be paid to the bondholder. In the case of a firm's insolvency, a bondholder has a priority of claim to the firm's assets before the preferred and common stockholders. Also, bondholders must be paid interest due them before dividends can be distributed to the stockholders. A bond's par value is the amount that will be repaid by the firm when the bond matures. The contractual agreement of the bond specifies a coupon interest rate that is expressed either as a percent of the par value or as a flat amount of interest which the borrowing firm promises to pay the bondholder each year. For example: A $1,000 par value bond specifying a coupon interest rate of 9 percent is equivalent to...

...Interest Rates and BondValuation
Chapter 6 6.2 More on Bond Features
Securities issued by corporations are classified as equity securities and debt securities. A debt in very simple terms represents something that must be paid as a result of borrowing money, when corporations borrow money they make regular interest payments as well as paying the principal amount at the end of the period. There are three main differences between debt and...

...enrolled in an Investments class has picked a project on bond price theorems.
The two main theorems that she decided to illustrate dealt with coupon rate and term-to-maturity and how these factors influence the price. Thus she included 2 bonds with the same rating and term with a different coupon rate, as well as two bonds with the same rating and coupon rate with different terms.
She thought that if the bond markets were efficient,...

...ancial Asset Valuation
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Prof. P. Yourougou
MBC 633 – Managerial Finance
Lect. 03 - 2
Various Interest Rate Measures
Coupon rate Coupon rate
periodic cash flow a bond issuer contractually periodic cash flow a bond issuer contractually promises to pay a bond holder promises to pay a...

...RJR NABISCO CASE
Guzmán Colilla Barreiro
Asset Valuation
02/04/15
Questions for RJR Nabisco case
1. What was the value of RJR Nabisco under
Asset Beta:
= 0.50
= 0.92
Ba=(0.50+0.92)/2 = 0.7
Assume that Rf = 9% (from the Marriott Case)
Assume that Rp=8% (from the Marriott Case)
Ka = Rf + BARp
Ka = 9% + (0.7)(8%) = 14.6%
a) The pre-bid operating strategy?
b) The Management Group's strategy?
c) KKR's operating strategy?
2. What accounts for any...

...
HW BondValuation and Bond Yields
Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds:
• Bond A has a 7% annual coupon, matures in 12 years, and has a $1000 face value.
• Bond B has a 9% annual coupon, matures in 12 years, and has a $1000 face value.
• Bond C has...

...discusses the valuation of stocks and bonds. It says that in textbooks, the valuation of stocks and bonds is simply stated as the present value of all the future cash flows expected from the security. The concept is logical, straightforward, and simple. The valuation of bonds is usually presented first, since the relatively certain cash flows are broken into an annuity and a payment of the par value at some...

...Assignment no. 1
Fixed Income Securities and Markets
Question A.1
Given the following bond:
|starting date |30/09/2011 |
|maturity date |30/09/2014 |
|coupon rate |4.00% |
|coupon frequency |annual |
|day count |act/act |
|nominal value |100 |
a) Calculate the price...

...BONDSBonds pay fixed coupon (interest) payments at fixed intervals (usually every six months) and pay the par value at maturity.
Par value = $1,000
Coupon = 6.5% or par value per year,
or $65 per year ($32.50 every six months).
Maturity = 28 years (matures in 2032).
Issued by AT&T.
Types of Bonds
Debentures - unsecured bonds.
Subordinated debentures - unsecured “junior” debt.
Mortgage bonds - secured bonds....