Bonds
M Sc Strategic Management
Tutorials Long term Debt Finance Questions and Answers
Using present value to value bonds
A bond, from the perspective of the person issuing the bond is a form of long term debt.
In the hands of the person who has acquired the bond it is an asset.
The agency issuing the bond agrees to pay a fixed sum of money to the holder of the bond for a period of years and then, at the end of that period, to pay back the face value of the bond.
Bonds can be issued by a variety of agencies/companies:
1. Municipal bonds: issued by cities, states and other local agencies
2. Government bonds: issued by the department of finance/treasury department of a government
3. Corporate bonds: issued by companies
Our main interest in relation to bonds is in corporate bonds. Why do companies issue bonds?
• Raise finance
• Often cheaper than bank borrowings
Terminology relevant to bond valuation
• Nominal/Face value/Principal – This is the amount on which interest payments are based. It is normally a round sum such as €1,000.
• Redemption value – This is the amount that will be paid out by the issuer of the bond when he comes to repay/redeem it.
• Coupon – The amount of interest paid on the bond is referred to as the coupon and the rate (%) is the coupon rate.
Premium/Discount - When you buy a bond you may pay a premium to acquire that bond or alternatively you may buy the bond at a discount. Where this occurs, the amount actually paid for the bond is greater (where it is acquired at a premium) or less (where it is acquired at a discount) than the face value of the bond. Whether you can acquire a bond at a discount or will have to pay a premium to acquire it will depend on how the coupon/interest rate being paid on the bond compares to the interest rate being paid on new issues of bonds.
A premium bond is therefore one where the bond value is more than its face value.
A discount bond is one where the
Tutorials Long term Debt Finance Questions and Answers
Using present value to value bonds
A bond, from the perspective of the person issuing the bond is a form of long term debt.
In the hands of the person who has acquired the bond it is an asset.
The agency issuing the bond agrees to pay a fixed sum of money to the holder of the bond for a period of years and then, at the end of that period, to pay back the face value of the bond.
Bonds can be issued by a variety of agencies/companies:
1. Municipal bonds: issued by cities, states and other local agencies
2. Government bonds: issued by the department of finance/treasury department of a government
3. Corporate bonds: issued by companies
Our main interest in relation to bonds is in corporate bonds. Why do companies issue bonds?
• Raise finance
• Often cheaper than bank borrowings
Terminology relevant to bond valuation
• Nominal/Face value/Principal – This is the amount on which interest payments are based. It is normally a round sum such as €1,000.
• Redemption value – This is the amount that will be paid out by the issuer of the bond when he comes to repay/redeem it.
• Coupon – The amount of interest paid on the bond is referred to as the coupon and the rate (%) is the coupon rate.
Premium/Discount - When you buy a bond you may pay a premium to acquire that bond or alternatively you may buy the bond at a discount. Where this occurs, the amount actually paid for the bond is greater (where it is acquired at a premium) or less (where it is acquired at a discount) than the face value of the bond. Whether you can acquire a bond at a discount or will have to pay a premium to acquire it will depend on how the coupon/interest rate being paid on the bond compares to the interest rate being paid on new issues of bonds.
A premium bond is therefore one where the bond value is more than its face value.
A discount bond is one where the