Bond Valuation

LIVE PROJECT

TO CALCULATE THE PRESENT VALUE AND YTM OF THE BOND Submitted by:-

Mayuri Gariba Mudit Agrawal Nikhil Bakre Nikita Agrawal Pooja Zaveri

21/10/2008

Submitted to:MRS. Prashant Jain Faculty(F.M) PRESENT VALUE AND YTM

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  Objective   Introduction   Formula   Data Calculation

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To calculate Present Value(PO) and Yield to Maturity(YTM) of a Bond

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BONDS: In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date. 

Bonds and stocks are both securities, but the major difference between the two is that stockholders are the owners of the company whereas bond-holders are lenders to the issuing company.

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 Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. 

An exception is a consol bond, which is a perpetuity

(i.e., bond with no maturity).

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FACE VALUE:-

 

The face value of bonds usually represents the principal or redemption value. Interest payments are expressed as a percentage of face value. Before maturity, the actual value of a bond may be greater or less than face value, depending on the interest rate payable and the perceived risk of default.

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  As bonds approach maturity, actual value approaches face value.   Its also called as Par value . A BOND is generally issued at the par value of Rs 100 and sometimes Rs 1000.

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Coupon rate or Interest:

The coupon or coupon rate of a bond is the amount of interest paid per year expressed as a percentage of the face value of the bond.

Maturity:-  The bond's maturity date refers to a future date on which the issuer pays the principal to the investor.

 

Bond maturities usually range from one day up to 30 years or even more.

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Redemption value:   The value which the bond holder gets on maturity

is called Redemption value.

 A bond may be redeemed at par, at premium

(more than par) or at discount than par).

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When a bond sells at a discount, YTM > current yield > coupon yield. When a bond sells at a premium, coupon yield > current yield > YTM. When a bond sells at par, YTM = current yield = coupon yield amt

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Present Value:PO

= I (PVIFAkd,n) + F (PVIFkd,n) = I {(1+k)n – 1/k(1+k)n} + F {1/(1+k)n}

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Yield to Maturity:  YTM = {I+ (F-P)/n} / (F+P)/2  

Where:-

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I = Annual Interest kd = k = Required rate of return n = Maturity period of bond Po = Present Value of bond F = Par value repayable at the maturity P = Current market price of the bond PRESENT VALUE AND YTM

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Bond Holder

Company name

Mkt price (P)

Annual ROR( Maturity Interest (I) kd = period(n) k)

Face value or Par value (F)

Navin Shah

Bank of Baroda

101.00

8.95%

10%

10yrs

1000

Hariom Gupta

BSES Ltd.

96.00

5.95%

7%

15yrs

1000

Ankit Agrawal

Canara bank

126.00

9.00%

11%

15yrs

1000

Narendra Jain

CITICORP FINANCE LIMITED

195.00

10.25%

8%

3yrs

1000

Sumeet Natwani

EXIM BANK

86.00

9.04%

10%

5yrs

1000

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Present Value:PO = I (PVIFAkd,n) + F (PVIFkd,n) = I {(1+k)n – 1/k(1+k)n} + F {1/(1+k)n} = 89.5{(1+0.10)10 - 1/0.10(1+0.10)10} +1000{(1/(1+0.10)10} = 3737. 50 21/10/2008

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Yield to Maturity:  YTM = {I+ (F-P)/n} / (F+P)/2  

= {89.5 + (1000-101)/10} / (1000+101)/2 = 179.4/550.5 = 0.32 21/10/2008

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