Scribd Logo
Upload

Welcome to Scribd!

  • 520 views

    Bond Valuation Summary & Notes

    Uploaded by

    Wu Zhe
    This document discusses corporate debt and bond valuation. It covers the key relationships in bond valuation, including that bond value is inversely related to changes in yield to maturity. Bond value equals the present value of interest payments plus the present value of par value at maturity. The document also discusses types of bonds, determinants of interest rates like inflation and risk, and the Fisher effect relationship between nominal interest rates and real interest rates plus expected inflation.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd

    Bond Valuation Summary & Notes

    Uploaded by

    Wu Zhe
    520 views3 pages
    This document discusses corporate debt and bond valuation. It covers the key relationships in bond valuation, including that bond value is inversely related to changes in yield to maturity. Bond value equals the present value of interest payments plus the present value of par value at maturity. The document also discusses types of bonds, determinants of interest rates like inflation and risk, and the Fisher effect relationship between nominal interest rates and real interest rates plus expected inflation.

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document discusses corporate debt and bond valuation. It covers the key relationships in bond valuation, including that bond value is inversely related to changes in yield to maturity. Bond value equals the present value of interest payments plus the present value of par value at maturity. The document also discusses types of bonds, determinants of interest rates like inflation and risk, and the Fisher effect relationship between nominal interest rates and real interest rates plus expected inflation.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    520 views3 pages

    Bond Valuation Summary & Notes

    Uploaded by

    Wu Zhe
    This document discusses corporate debt and bond valuation. It covers the key relationships in bond valuation, including that bond value is inversely related to changes in yield to maturity. Bond value equals the present value of interest payments plus the present value of par value at maturity. The document also discusses types of bonds, determinants of interest rates like inflation and risk, and the Fisher effect relationship between nominal interest rates and real interest rates plus expected inflation.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Corporate Debt

    Chapter 9: Coverage

    Valuing Corporate Debt

    Bond/ Debt Valuation


    (Ch 9 Titman, Ch 7 Keown)
    VYE Summary & Notes

    Bond Valuation- 4 Key

    Relationships Types of Bonds Inflation and rates of return

    Corporate Debt
    Firms can borrow
    A. Private financial markets thru various types of financial institutions 1. Floating rate or fixed rate loans (LIBOR rate, pdex) 2. Funds for working capital or transactions 3. Debt unsecured or unsecured
    2

    Corporate Debt
    Firms can borrow B. Public financial markets by issuing corporate bonds which differ on a variety of features. 1. Bond indenture 2. Claim on assets 3. Par value 4. Coupon rate of interest 5. Maturity 6. Call provision or conversion feature 7. Bond ratings default risk

    Corporate Debt

    Valuing Corporate Debt


    Required/ expected rate of return = YTM Interest rate = coupon rate Par value = maturity value $1,000; date Bond value Vb = market value = intrinsic value = present value of coupon interest payments and the principal amount (par value) Purpose: higher returns, higher risk, but cheaper than common stock
    4 5

    Valuing Corporate Debt

    Bond Valuation: Four Key Relationships


    1. Value inversely related to changes in YTM

    Vb = PV of interest payments as an annuity + PV of maturity value Vb = Interest pmt x PVIFA i, n + $1000 x PVIF i,n

    2. MV < $1,000 if YTM> i (discount) MV > $1,000 if YTM< i (premium) 3. As n maturity, MV $1,000 par value 4. LT bonds have > interest risk than ST bonds
    6 7

    Types of Bonds
    There are a variety of types of bonds depending on their characteristics, usually a function of the following bond attributes:
    1. Secured vs unsecured 5. Coupon level 2. Priority of claim 3. Initial offering market 4. Abnormal risk 6. Amortizing or

    Types of Bonds

    non-amortizing
    7. Convertibility

    Determinants of Interest Rates


    Interest rates are affected by the real rate
    of interest and the inflation premium

    Determinants of Interest Rates


    As n (bonds maturity) becomes longer,
    the more the bond price fluctuates when interest rates change.

    Risk of default = possibility that bond


    issuer will fail to repay the borrowed amount

    A maturity premium reflects this risk Term Structure of interest rates


    reflects relationship between time to maturity and interest rates (all other variables constant)
    10 11

    Add a premium to interest rates to


    reflect risk of default

    Inflation, Rates of Return, and the Fisher Effect


    Interest Rates

    Interest Rates
    Conceptually:

    Nominal risk-free Interest Rate

    Real risk-free Interest Rate

    Inflationrisk premium

    rnominal
    Mathematically:

    rreal

    rinflation

    (1 + rnominal) = (1 + rreal) (1 + rinflation)


    12

    This relationship is known as the Fisher Effect


    13

    Interest Rates
    Suppose the real rate is 3%, and the nominal rate is 8%. What is the inflation rate premium?

    Interest Rates
    To simplify:

    (1 + rnominal) = (1 + rreal) (1 + rinflation) (1.08) = (1.03) (1 + rinflation) (1 + rinflation) = (1.0485), so rinflation = 4.85%
    14

    rnominal = rreal + rinflation + rreal x rinflation r=R+i+Ri

    15

    REFERENCES:
    Titman, S., Keown, A.j, Martin, J.D., (2011). Financial Management: Principles and Applications. (11th Ed.). Pearson Education, Pearson/Prentice Hall Keown, A.J., Martin, J.D., Petty, J.W., Scott Jr, D.F., Financial Management: Principles and Applications, 10th Edition, Pearson Prentice Hall 2005 Gitman, L. J. Principles of Managerial Finance, (11th ed.) Massachusetts: Addison Wesley Longman

    16

    You might also like