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Lecture 8 BF

This document provides an overview of bonds and bond valuation. It discusses what bonds are, different types of bonds, their key characteristics including coupon rates, maturity dates, and call provisions. It also covers the legal aspects of bonds including indentures and trustees. Bond ratings are explained as reflecting the probability of default, and major credit rating agencies are identified. The document aims to introduce the topic of bond valuation.

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Hussnain Abbas
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21 views

Lecture 8 BF

This document provides an overview of bonds and bond valuation. It discusses what bonds are, different types of bonds, their key characteristics including coupon rates, maturity dates, and call provisions. It also covers the legal aspects of bonds including indentures and trustees. Bond ratings are explained as reflecting the probability of default, and major credit rating agencies are identified. The document aims to introduce the topic of bond valuation.

Uploaded by

Hussnain Abbas
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Business Finance

(MGT 232)

Lecture 8

4-1
Bond
Bond Valuation
Valuation

4-2
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

4-3
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

4-4
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.

4-5
Types of Bonds
 Treasury Bonds :
o Bonds issued by the government
o No default risk
 Corporate Bonds:
o Bonds issued by the corporations
o Exposed to default risk
 Municipal Bonds:
o Issued by state or local government
o It has default risk and low interest rate
 Foreign Bonds:
o Default risk is involved
o Currency risk
4-6
Characteristics of Bonds

 The bond’s coupon rate is the stated rate of interest.

• The maturity value (MV)


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

4-7
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 protection1
• Call redemption
• Convertible Bonds
• Bonds with purchase warrants
4-8
• Income Bonds
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.

4-9
Legal Aspects of Bonds

Indenture Trustee

4-10
Bond Ratings
• Bonds are given ratings to reflect their
probability of going into default.
RATING IMPORTANCE
AAA Investment grade bonds
AA (high quality bonds, less risk)
A
BBB
BB Speculative bonds
CCC (high risk , low cost)
CC
C
D In default
4-11
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

4-12
Summary
• What is a Bond?
• Types of Bond
• Characteristics of Bonds
• Legal Aspects of Bonds
• Bond Ratings

4-13

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