1.2.2 Introduction to bond valuation
• Bond valuation is a technique which is used to determine the fair value of a particular bond. Bond valuation includes calculating the present value of the bond's future interest payments, also known as its cash flow, and the bond's value upon maturity, also known as its face value or par value.
• An investor uses bond valuation to determine what rate of return is required for an investment in a particular bond to be worthwhile because a bond’s par value and interest payments are fixed.
• Bond valuation is only one of the factors investors consider in determining whether to invest in a particular bond. Other important considerations are: o The issuing company's creditworthiness, which determines whether
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(also if brought at premium and matures at par, it is also not taken)
In short, Time value of money is ignored.
II. Yield to maturity:
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until the end of its lifetime. It takes current coupon income and the capital gain / loss if held till maturity.
Calculations of yield to maturity assume that all coupon payments are reinvested at the same rate as the bond’s current yield. It takes into account the bond’s current market price, par value, coupon interest rate and term to maturity. YTM is a complex but accurate calculation of a bond’s return that can help investors compare bonds with different maturities and coupons. Yield to maturity is also often known as “book yield” or “redemption yield.”
Because of the complex means of determining yield to maturity, it is often difficult to calculate a precise YTM value. Instead, one can approximate YTM by using a bond yield table. Because of the price value of a basis point, yields decrease as a bond’s price increases, and vice versa. For this reason, yield to maturity may only be calculated through trial-and-error,
• Formula:
The method for calculating YTM can then be represented with the following
In an open market if notes are traded the quoted prices and the market rate of interest of the notes should come up with enough evidence to get the present value. An interest rate is guessed that may be slightly different from the stated rate. This may have an effect on the financial statement that is material if the face value of the note is large enough and the term of it is long.
The high yield bond is a bond that features higher returns but with a lower credit rating than typical investment-grade bonds. These bonds can also be referred to as ‘junk bonds’ that are rated as below investment grade by organizations such as Moody’s and Standard and Poor’s. [Appendix #1] Generally, companies that issue high yield bonds may receive their rating due to a few characteristics, such as being less established than typical household brands, showing weak financial performance or they may have suffered a financial setback at some point in their corporate history. Although, high yield bonds may seem to have a relatively negative reputation among investors they possess many attractive advantages which include: diversifying portfolios, greater yields, lower volatility thus makings for a good long-term investment and the fact that bondholders have priority of recovering their money over equity security holders in the case of bankruptcy. These bonds are accessible to investors either as individual issues or through the means of high-yield mutual fund investments. On the other hand, there are certainly risks involved when investing in high yield bonds, such as credit risk where there is the possibility that the issuer defaults on the principal or interest payments over the course of the term and investment in these bonds ultimately depends on how informed the investor is and the amount of risk the investor is willing to tolerate. Similar to other types of securities there is always the threat of economic downturn and risks occurring when investing in international markets, such as political and exchange rate risks. In contrast, high yield bonds are able to mitigate interest rate risks better, and are less vulnerable to drast...
What is a bond? Bonds are often considered by investors to be “financial IOU's.” Frequently, bonds are issued from banks designed for quick, upfront cash used in lending purposes, such as loans. When purchasing a bond, the buyer pays an upfront sum of money to the seller. By the terms and conditions...
Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps.
Bonds and Equities Defining Bonds and Equities Bonds are certificates of obligation or indebtedness, issued by governments and companies to raise funds repayable at interest over relatively long periods. Equities are investments exercised by purchasing a share in the ownership of a corporation; and are more commonly called stocks or shares (as in the stock market or share market). Bonds have a very favorable relationship with equities. Historically, when equity markets fell, bonds had gone up in value, partially offsetting the fall. When equity markets rise, interestingly, high quality bonds also tend to rise, although to a lesser extent. Therefore for an investor with equity portfolio wanting to reduce portfolio volatility or make the portfolio less susceptible to a fall in equity markets bonds are the most appropriate. Bonds generally pay a much higher income than high quality government and corporate bonds to compensate for higher risk. Similar to equities, bonds tend to perform best when economic growth is strong with low stable interest rates. In such an environment the ability of these companies to pay interest and repay their bonds on the maturity date is greatly enhanced. [Z. Bodie, 2000] Investment in bonds and equities, usually via stock-markets and other exchanges for financial instruments. So-called "portfolio investment" is usually relatively easy to re-sell; hence this type of investment can flow relatively easily into and out of a country's stock-markets. This can lead to volatility in share-prices and levels of capital availability. What’s the difference? Equities are shares listed on the stock exchange. Their prices are influenced by the underlying performance of the companies, the sectors in which they operate ...
Going back to the history of VE, In1947 VE methodology was initially implemented as “value analysis” by Lawrence Delos Miles in order to make grounding material to increase product value. It was used to indicate to the study of the product during the design stage (WCL, 2014) and “uses a value equation that says value is equal to function divided by cost” (Elayache, 2010). This equation calculates the functionality of the project in relation to the total cost of the project (all construction cost plus running cost)
The concept of beta has gained prominence due to the pioneering works of Sharpe (1963), Lintner (1965) and Mossin (1966). There are many studies that examine the behaviour and nature of beta. These studies include the impact of the length of the estimation interval, the stability of individual security beta as compared to portfolio beta, factors influencing the beta as well as the stability of beta in various market conditions.
Before evaluating whether $1b is value enhancing in quantitative measure, ability to cope with pre-requisite interest payment and potentially dividend payment (possibly dividend growth maintenance) should be considered.
Debt capital refers to money borrowed. Examples of this include bonds and short-term commercial paper. Bonds are more widely used because it provides a company with years to come up with the principal while paying interest only. Bonds are rated (i.e. AAA, AA, BB, etc.), these ratings correspond to the risk of default. The higher the rating, the lower likelihood of default and therefore a lower interest rate accepted by the lender. Short-term commercial paper is typically...
Present theoretical arguments for the choice of net present value as the best method of investment appraisal;
The bail bond may cost around 10% of the total amount of the bail set by the judge. It means in case the suspect appears in the court; the bail bonds company gets back the all the amount of bail including the ten percent paid premium by the defendant. The bail premium is paid to the bail bond agency for the use of their
The Net Present Value (NPV) is a Discounted Cash Flow (DCF) technique that relies on the concept of opportunity cost to place a value on cash inflows arising from capital investment, where opportunity cost is the "calculation of what is sacrificed or foregone as a result of a particular decision".
The calculation of intrinsic value, though, is not so simple. As the definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, will almost inevitably come up with at least slightly different intrinsic value figures.
This is the rate of return (the discount rate) at which the net present value of the investment is zero, or that is the discount rate at which the discounted income from the project is equal to the investment costs
Do not subtract current long term t bond rate from historical avg. when estimating risk premium for CAPM approach.