A debenture is a legal document containing an

acknowledgement of indebtedness by a company.

Rate of Interest is Fixed
Redeemable to pay the principal at a given date of
maturity.


Bond Features
Indenture
Maturity
Payment of fixed Interest
Call Feature ( Company has aright to call the
bonds)
Reasons for issuing bonds
To Reduce Cost of Capital
To widen the sources of Funds
To Preserve Control
To Gain the benefit of leverage
To Effect tax saving


Types of Bonds
Convertible bonds are those which can be
convertible in to equity shares after a certain
period of time.
Non Convertible Bonds are those which cannot be
convertible in to equity shares after a certain
period of time.

Redeemable bonds are those which are redeemed after a certain period
of time
Non Redeemable bonds are those which are not redeemed until the
company is winded up
Government Bonds In general, fixed-income securities are
classified according to the length of time before maturity. These
are the three main categories:
Bills - debt securities maturing in less than one year.
Notes - debt securities maturing in one to 10 years.
Bonds - debt securities maturing in more than 10 year




Zero-Coupon Bonds are a type of bond that makes no coupon
payments but instead is issued at a considerable discount to par
value. For example, let's say a zero-coupon bond with a Rs 1,000 par
value and 10 years to maturity is trading at Rs 600; you'd be paying
Rs 600 today for a bond that will be worth Rs 1,000 in 10 years

Bond Returns
Current Yield : The current yield calculates the
percentage of the return that the annual coupon
payment provides to the investor. It calculates the
percentage of the actual rupee coupon payment is of
the price the investor pays for the bond. This can be
easily found by dividing the bond's coupon yield by
it's market price.


Coupon Yield : The annual interest rate established
when the bond is issued.
Yield to Maturity: This is the return that the
investor will receive from their entire
investment in the bond.
Yield to Call: Yield to call (YTC) is the interest
rate that the bond holders would receive if
they held the bond until the call date. The call
date is the date on which a bond may be
redeemed by the issuer before the bond's
maturity. If this happens, the bond will be
redeemed at par or a higher value.

Financial Asset Valuation
( ) ( ) ( )
PV =
CF
1 + r
. . . +
CF
1 + r
1 n
1
2
2
1
CF
r
n
.
0 1 2 n
r
CF
1
CF
n
CF
2
Value
...
+ +
+
Whats the value of a 10-year, 10% coupon
bond if r
d
= 10%?
( ) ( )
V
r
B
d
=
$100 $1 , 000
1
1 10 10
. . .
+
$100
1 + r
d
100 100
0 1 2 10
10%
100 + 1,000 V = ?
...
= $90.91 + . . . + $38.55 + $385.54
= $1,000.
+ +
+
1 r +
( ) d
Whats the YTM on a 10-year, 9% annual
coupon, Rs 1,000 par value bond that sells
for Rs 887?
90 90 90
0 1 9 10
r
d
=?
1,000
PV
1

.
.
.
PV
10

PV
M
887 Find r
d
that works!
...
10 -887 90 1000
N I/YR PV PMT FV
10.91
( ) ( ) ( )
V
INT
r
M
r
B
d
N
d
N
=
1 1
1
...
+
INT
1 + r
d
( ) ( ) ( )
887
90
1
1 000
1
1 10 10
=
r r
d d

+
90
1 + r
d
,
Find r
d
+ +
+ +
+ +
+ +
INPUTS
OUTPUT
...
If coupon rate < r
d
, bond sells at a
discount.
If coupon rate = r
d
, bond sells at its par
value.
If coupon rate > r
d
, bond sells at a
premium.
If r
d
rises, price falls.
Price = par at maturity.
15
Graphical Relationship Between Price and
Yield-to-maturity (YTM)
600
700
800
900
1000
1100
1200
1300
1400
1500
0% 2% 4% 6% 8% 10% 12% 14%
B
o
n
d

P
r
i
c
e

Yield-to-maturity (YTM)
16
Bond Prices: Relationship Between Coupon and
Yield
If YTM = coupon rate, then par value = bond price
If YTM > coupon rate, then par value > bond price
Why? The discount provides yield above coupon rate
Price below par value, called a discount bond
If YTM < coupon rate, then par value < bond price
Why? Higher coupon rate causes value above par
Price above par value, called a premium bond
17
The Bond Pricing Equation
t
t
r) (1
F
r
r) (1
1
- 1
C Value Bond
+
+
(
(
(
(

+
=
18
Find present values based on the payment
period
How many coupon payments are there?
What is the semiannual coupon payment?
What is the semiannual yield?
B = 70[1 1/(1.08)
14
] / .08 + 1,000 / (1.08)
14
= 917.56
Or PMT = 70; N = 14; I/Y = 8; FV = 1,000; CPT
PV = -917.56
Pure Discount Bonds
Pure discount bonds are called deep-discount
bonds or zero-interest bonds or zero-coupon
bonds.
The market interest rate, also called the
market yield, is used as the discount rate.
Value of a pure discount bond = PV of the
amount on maturity:

( )
0
1
n
n
d
M
B
k
=
+
Pure Discount Bonds
Example: A company may issue a pure discount bond
of Rs 1,000 face value for Rs 520 today for a period of
five years. The rate of interest can be calculated as
follows:

( )
( )
5
5
1/ 5
1, 000
520
1 YTM
1, 000
1 YTM 1.9231
520
1.9231 1 0.14 or 14% i
=
+
+ = =
= =
Perpetual Bonds

Perpetual bonds, also called consols, has an
indefinite life and therefore, it has no maturity value.
Perpetual bonds or debentures are rarely found in
practice.