Bonds

Arslan Nawaz L1F11MCOM2165

What are Bonds?

A debt investment in which an investor loans money to an entity that borrows the funds for a defined period of time at a fixed interest rate.

Characteristics of Bond
Face Value / Par Value The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures meaning that the entity that sold the bond will return to the investor the original amount that it was loaned, called the principal. Coupon rate / Interest rate The coupon rate is the amount of interest that the bondholder will receive. Maturity The maturity date is the date in the future on which the investor's principal will be repaid. Issuer Issuer is a legal entity that develops and sells .

Issuers of Bonds

Companies

Issuers of Bonds

Municipalities

States

Types of Bonds

Bonds by issuer

Bonds by coupon

Corporate bond

Government bond

Municipal bond

Perpetual bond

Zero-coupon bond

Coupon bond

Examples of Bonds

Treasury bond

War bond

Revenue bond

Prize bonds

WAPDA Bonds

Euro Bonds

Types of Bonds by Coupon Rate

Zerocoupon bond

Bonds
Perpetual bond Coupon bond

Perpetual Bond
A perpetual bond is a bond that never matures. It has an infinite life. Perpetual bonds pay coupons forever, issuer does not have to redeem them.

Valuation of Perpetual Bond

V = i/r
i = Interest r = required rate of return

WAPDA Bond has a 1,000 Rs face value and provides an 8% annual coupon. The required rate is 10%. What is the value of the perpetual bond?
i = 1,000 Rs ( 8%) = 80 Rs r = 10%. V = I / r = 80 / 10% = 800 Rs

Zero Coupon Bond

A zero coupon bond is a bond that pays no interest but face value repaid at the time of maturity.

Valuation of Zero-coupon Bond

V = F.V(1+r)-n
F.V = Face value r = Rate of Interest n = No of years

Nestle bond has a 1,000 Rs face value and a 30 year life. The interest rate is 10%. What is the value of the zero-coupon bond?
V = F.V (1+r) -n
V = 1000 (1+0.1) -30 V = 57.00 Rs

Coupon Bond
A coupon bond is a bond that pays interest and face value repaid at the time of maturity.

Valuation of Coupon Bonds

V = P[1-(1+r) n /r] + F.V(1+r)-n
P = Interest payments
r = required rate of return F.V = Face value n = Numbers of years

Allied Bond has a 1,000 Rs face value and provides an 8% annual coupon for 30 years. The required rate is 10%. What is the value of the coupon bond? V = 80[1-(1+0.1) 30 /0.1] + 1000(1+0.1)-30
= 754.16 + 57.00 = 811.16 Rs