Bonds• What is bonds

• Valuation of bonds

What is a Bond?

A Bond represents a contract whereby one party

lends money to another on pre-determined terms

with regards to rate and periodicity of interest,

repayment of principal amount by the borrower to

the lender.

Segments of Bonds in India:

• Government Bonds- Centre, State & State-sponsored

• Corporate Bonds- Commercial papers & Bonds

Terms used frequently:• Face Value• Market Value• Redemption value• Coupon rate• Maturity

Types of Bonds:

On the basis of coupon:• Zero coupon bond

• Fixed coupon bond

• Floating rate coupon bond

On the basis of option:• Callable bonds

• Puttable bonds

• Convertible bonds

Basic Bond Valuation ModelA technique for determining the fair value of aparticular bond.

Bond Price= Σ Coupon payments (n) + Redemption Value

(1+r)^n (1+r)^n

Calculation using

discounting method:

Calculation using Tables:

When to use PVIF & when to use PVIFA

Calculation using Excel:

Bond Price- Simple Present Value formula is used

To compute the YTM- Rate Function is used

To compute Effective Annual Rate- EFFECT function is used

Bond Yield:• Current Yield- Relates the Annual Coupon Payments to

the Market Price

CY= Annual Interest

Price

• Yield to Maturity- The interest rate at which the present

value of cash flows from owning the Bond is equal to its

price.

• Yield to call- The interest rate at which the present value

of cash flows from owning the bond, till the bond is

called by the issuer, is equal to its price.

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