BONDS AND THEIR

VALUATIONS
Group 3
WHAT IS BONDS?
Long term debt instrument in which a borrower
agrees to make payments of principal and interest,
on specific dates, to the holders of the bond.
Issued by corporations & government agencies that
are looking for long term debt capital.
FOUR MAIN ISSUER OF BONDS
Treasury Bonds - also known as government bonds,
issued by the government.
- no default risk (credit risk)
Corporate Bonds - issued by business firms.
- exposed to default risk
 Municipal Bonds - the term given to bonds issued
by state and local governments.
- exposed to some default risk
Foreign Bonds - issued by foreign government or a
foreign corporation.
- exposed to default risk.
KEY CHARACTERISTICS OF BONDS

Par Value stated face value of the bond.

- generally represents the amount of money the firm borrows
and promises to repay on the maturity date.
Coupons Interest Rate stated annual interest rate on a bond.
Coupon payment the specified number of peso of interest
paid each year.
Example: Allieds bond have a P1000 par value and they pay P100 in
interest each year.
Coupon interest rate = P100/1000 = 10%
 Fixed-rate bond a bond whose interest rate is
fixed for its entire life.
Floating-rate bond a bond whose interest rate
fluctuates with shifts in the general level of interest rates.
Example: Treasury bills rate plus 0.5%

Zero Coupon Bond a bond that pays no annual

interest but is sold at a discount below par, thus compensating
investors in the form of capital appreciation.
 Original Issue Discount (OID) Bond any bond
originally offered at a price below its par
Example: Example: An investor spends P900 to buy a bond with a
par value of P1000. His original discount issue is P100.
Maturity Date specified date on which the par value of a bond
must be repaid.
Example: Allieds bonds which were issued on January 3, 2009,
will mature on Jan. 2, 2024, they had 15-year maturity at the time
they were issued.
Original Maturity the number of years to maturity at
the time a bond is issued.
 Call Provisions - a provision in a bind contract that gives
the issuer the right to redeem the binds under specified
terms prior to the normal maturity date.
Sinking Fund Provision a provision in a bond contract
that requires the issuer to retire a portion of the bond issue
each year.
Example: Company Y issues 10,000,000 of bonds that
mature in 10 yrs. If the bond have sinking fund, Company Y
might be required to retire 1,000,000 of the bonds each
year for 10 yrs.
 Other Features
Convertible Bond a bond that is exchangeable at the option
of the holder for the issuing firms common stock.
Example: Company XYZ bond with a $1,000 par value that is
convertible into Company XYZ common stock. It has
a coupon of 6%, payable annually. Company XYZs convertible
bond has a conversion ratio of 20. The investor is effectively
purchasing 20 shares of stock XYZ for $50 per share ($1000 / 20 =
$50).
 Warrant a long term option to buy a stated number of shares
of common stock at a specified price.
Example: Company XYZ issues bonds with warrants
attached, each bondholder might get a $1,000 face-
value bond and the right to purchase 100 shares of Company
XYZ stock at $20 per share over the next five years.
Putable Bonds - a bond with a provision that allows its
investors to sell it back to the company prior to maturity at a
prearranged price.
Example: XYZ bond issued in 2000 and maturing in 2020. The
indenture stipulates that the holder may put (sell) the bond after
four years.
The XYZ bond due June 1, 2020 is putable on June 1, 2004
at 100% of par.
Income Bond a bond that pays interest only if its earned
Indexed (Purchasing Power) Bond a bond that has a interest
payments based on inflation index so as to protect the holder
inflation.