Bond Valuation

Related Concepts for Bond Pricing

 What is a Bond
 Features of a Bond
 Compound Interest
 Relation between Present Value and
Future Value
 Discounting
 Cash Flows
Characteristics of Bonds
1. Par value / Face Value / Redemption
Value
2. Coupon Rate / Stated Rate / Quoted
Interest Rate
3. Coupon payment frequency
4. Years to Maturity
5. Prevailing Market Interest Rate
(discounting factor)
Bond Valuation Equation
The present-value model
2n
Ct 2 Pp
Pm   
Where:
t 1 (1  i 2) t
(1  i 2) 2n

Pm=the current market price of the bond

n = the number of years to maturity
Ci = the annual coupon payment for bond i
i = the prevailing yield to maturity for this bond issue
Pp=the par value of the bond
 Converting the cash flows into annuity the
general expression becomes:
Price = C*{1-1/(1+r/m)^(m*n)} + FV/(1+r/m)^(m*n)
r

C =coupon paid by the bond

R =prevailing yield to maturity for this bond issue
M = compounding frequency
N = Number of years to maturity
FV = Face Value / Par Value / Redemption Value
 Calculate the price of the bond having
following properties:

 Coupon Rate=9%
 FV=100
 N=10 years
 R=4.98%
 M=2
 Coupon = Rs 9
 R = 4.98%
 M=2
 N = 10
 FV = 100
 Ans: Price=Rs 131.3638
Coupon, Yield and Price Relationship

 If yield < coupon rate, bond will be

priced at a premium to its par value

 If yield > coupon rate, bond will be

priced at a discount to its par value

 If yield = coupon rate the bond will

trade at par value