Valuation of Bonds

CHAPTER 6

VALUATION AND MANAGEMENT VALUATION AND MANAGEMENT OF BONDS
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© Oxford University Press, 2011

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CONTENTS
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Introduction Features of the bond
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Face Value l Coupon Rate Periodicity of coupon payments Maturity Redemption Value Fixed and Floating Rate Bonds Indexed Bonds Callable & Puttable Bonds C ll bl & P tt bl B d Zero Coupon and Deep Discount Bonds Convertible Bonds
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Types of Bonds Types of Bonds
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Cash Flow of the bond
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CONTENTS
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Pricing of bond/Yield on the bond Deep Discount/Zero Coupon Bonds & STRIPS Term Structure of Interest Rates Term Structure of Interest Rates Theories of Term Structure Duration of the Bond Bond Rating Bond Rating Bond Management Strategies
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B ONDS
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Bonds have emerged as one of the prominent financial instruments of i fi i li f capital markets world over. Bonds are the instruments of borrowings. borrowings. They promise a fixed return until their maturity and the payback of principal d h b k f l upon maturity.
VALUATION & MANAGEMENT OF BONDS CHAPTER 6

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F EATURES O F T HE B OND
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The terms and conditions for the issue of bonds are pre decided at the time of the issue as a part of bond indenture. t fb di d t Main features of bond indenture are:
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face value, coupon rate, coupon rate, periodicity of coupon payments, maturity period and t it i d d redemption value
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VALUATION & MANAGEMENT OF BONDS

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T YPES O F B ONDS
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Fixed rate and floating rate bonds Indexed bonds I d db d /p Callable /puttable bonds
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Bonds that can be called by the issuer prior to the maturity are known as callable Bonds, to the maturity are known as callable Bonds, while whose redeemable at the option of subscribers are known as puttable bonds

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Redemption in lump sum