Bond Analysis

Bond Analysis A bond is a long term debt security issued by govt. bodies and private firms to raise financial resources. In case of bonds rate of interest is generally fixed and known to the investors. Bonds may be secured or unsecured. To be secured is to be backed by collateral--the money or physical assets that a bond issuer must give to investors if the bond defaults.

Features of Bond 1. 2. 3. 4. 5.

Face Value- Face is called par value. Bonds usually issued at face value and interest is given on the basis of face value. Interest Rate- Bonds bears certain interest rate which remains fixed and known to investors. It is also called coupon rate. Maturity-Bonds are issued for a certain time period. Redemption value- The value that a bond holder will get on maturity is called redemption value or mature value. Bonds are redeemed are face value of premium. Market Value- Bonds may be traded in stock exchange. The value at which the bond will be traded it will be called market value.

Calculation of Present value of Bond Suppose an investor want to purchase a five year bond, Rs. 1,000 par value, bearing the nominal interest rate of 7 percent per annum. The investor required rate of return is 8 percent. What should be the value of the bond?

 Int1 Int2 Int3 Intn  Bn Bo =  + + + ... + 2 3 n n ( 1 + k ) ( 1 + k ) ( 1 + k ) ( 1 + k ) ( 1 + k )    70 70 70 70 70 1000  Bo =  + + + + + 2 3 4 5 5 ( 1 . 08 ) ( 1 . 08 ) ( 1 . 08 ) ( 1 . 08 ) ( 1 . 08 ) ( 1 . 08 )  

BondValue = [ Pr esentvalueof int erest ] + [ Pr esentvlaueofmaturity ]

BondValue = 279.51 + 681 = 960.51

Calculation of Yield to Maturity Yield to maturity is worthful to measure when bond is available at premium or discount. A bond is said to available at discount when it is available at less price than the face value. A bond is said to available at premium when it is available at more price than the face value.

A bond is available at Rs. 883/- with face value Rs. 1000/-. The bond will pay interest at 6 percent per annum for 5 years.

 Int1 Int2 Int3 Intn  Bn Bo =  + + + ... + 2 3 n n ( 1 + y ) ( 1 + y ) ( 1 + y ) ( 1 + y ) ( 1 + y )  

60 60 60 60 60 1000 8 8 3= + + + + + 2 3 4 5 (1 + y ) (1 + y ) (1 + y ) (1 + y ) (1 + y ) (1 + y )5 We obtain Yield to maturity =10 percent.

Calculation of Current Yield Yield to maturity takes into account present value of interest payments and capital gain or loss over the bond. But current yield is takes into account only annual interest and does not consider capital gain or loss. Current yield is annual interest divided by bonds current market price. A bond is available at Rs. 883/- with face value Rs. 1000/-. The bond will pay interest at 6 percent per annum for 5 years.

Annual int erest CurrentYield = currentmarketpriceofbond The current yield is 60/883= 6.8%

Calculation of Yield to Call When bond is issued with by back or call provision. Thus a bond can be redeemed or called before maturity. A 10 year bond will pay 10% interest, with face value Rs. 1000/- is callable is 5 years at a price of Rs. 1050/- The bond is currently available at Rs. 950/- What is the yield to call of the bond?