BOND VALUATION

P R E S E N T E D BY G R O U P 5
- N O VA L I N D A N E M O N I C A LU M B A N B AT U
- O K KY P RA M A D I S A L E H
- PA R D I YO
- R I Z K I A N D I S A P R A N ATA
- R U DY C A H YO N O P U T R O
Valuing Bonds
PRESENTED BY NOVALIN DANE MONICA LUMBANBATU
Valuing Bond
1. Types and characteristic of bonds
2. Market price, bond’s yield and relationship between bond price and yield
3. Calculate a bond’s yield to maturity and yield to call if maturity
4. Assessing a bond’s riskiness
5. Explain the different types of risk that bond investor and issuer
Bond
What is Bond ???

A long term contract under which a borrower agrees to make payments of interest and
principal on specific dates to the holders of the bond.

Types of bonds :
Based on Issuer :
a. Treasury / government bonds:
Bonds issued by the federal government, sometimes referred to as government bonds.
+ No default risk
- Bonds’ price do decline when interest rate rise
Government Bonds in Indonesia :
▪ Obligasi Rekap → Khusus untuk Rekapitalisasi Perbankan
▪ Surat Utang Negara → defisit APBN
▪ Obligasi Retail Indonesia (ORI) → Pembiayaan APBN yang dipecah retail
▪ Surat Berharga Syariah Negara /Obligasi Syariah (Sukuk) → untuk defisit
APBN namun bersifat syariah
Obligasi Negara Ritel
Types of Bond
b. Corporate bonds:
Bonds issued by the corporations :
default risk >>> credit risk
the higher risk higher return

c. Municipal Bonds :
Bonds issued by state and local governments

d. Foreign Bonds :
Issued by foreign government or corporations
e.g : Kangaroo Bond (Australia), Samurai Bond (Japan), Yankee Bond (USA)
Key Characteristic of Bonds
Depend on types of bonds

For example:
Some bonds are backed by specific asset , while other bonds have no such collateral
backup

a. PAR VALUE / FACE VALUE / PRINCIPAL VALUE

The value is the stated face value of the bond.
Bond : Rp 10.000.000.000
The par value generally represents the amount of money the firm borrowers and
promises to pay on the maturity date
Key Characteristic of Bonds
b. COUPON INTEREST RATE
Coupon payment :
The specified number of amount of interest paid each year.
Rp 1.000.000 p.a
Coupon interest rate :
The stated annual interest rate on a bond
Bond = Rp 1.000.000
Interest = Rp 100.000 p.a
Interest rate = 10% p.a
Key Characteristic of Bonds
Fixed Rate Bonds :
Bond whose interest rate is fixed for their entire year
Floating Rate Bonds :
Bonds whose interest rate fluctuates with shifts in the general level of
interest rates
Zero Coupon Bonds :
Bond that pay no annual interest but sold at a discount below par, thus
compensating investor in the form of capital appreciation
Rp 1.000.000.000 >>>> Rp 900.000.000
Key Characteristic of Bonds
c. MATURITY DATE
A specified date on which the par value of a bond must be repaid.
Bond issued Sept 1, 2019 will mature on August 31, 2039
20 year maturity at the time were issued.
Key Characteristic of Bonds
d. CALL PROVISION
A provision in a bond contract that give the issuer the right to redeem the
bond under specified term prior to the normal maturity date.
Bond issued Sept 1, 2019 will mature on August 31, 2039
Rp 1.000.000.000 >> i=10% p.a
Maturity
2019 2024 2030 2039
9 year

20 year
Maturity
Key Characteristic of Bonds
Key Characteristic of Bonds
Key Characteristic of Bonds
Key Characteristic of Bonds
Key Characteristic of Bonds
e. Sinking Fund :
A provision in a bond contract that require the issuer to retire a portion of a
bond issue each year
>>> Buy back >>> in two ways :

◦ It can call for redemption

◦ Buy on the open market

Which alternative will use?

Key Characteristic of Bonds
f. Other Features
Convertible Bonds
Bonds that are exchangeable at the option of the holder for the issuing firm’s common stock
Warrants
Long-term option to buy a stated number of shares of common stock at a specified price
Putable Bonds
Bonds with a provision that allow investors to sell them to the company prior to maturity at a pre
arranged
Income Bond
A bond that pays interest only if it is earned
Indexed (Purchasing Power) Bond
A bond that has interest payments based on an inflation index so as to protect the holder from inflation
Case
Company A sold a bond issue yield 6% that was callable immediately. On the
same day Company B sold an issue with the similar risk an maturity
compared A that yielded only 5%, but its bond non callable for ten years.
Which prefer to the investor ?
Why ?
Bond Valuation &
Bond Yields
PRESENTED BY OKKY PRAMADI S ALEH
Bond Valuation
The cash flows for a standard coupon-bearing bond consist of interest
payments during the bond’s life plus the amount borrowed (generally the par
value) when the bond matures.
0 r d%
1 2 N
...
Bond’s ValueCF1 CF2 CFN
(INT) (INT) (INT)
M
Bond Valuation
What is the value of a 10-year, 10% annual coupon bond, if r d = 10% and par
value = $1000 ?
0 1 2 n
rd = 10%
...
VB = ? $100 $100 $100 + $1,000
$100 $100 $1,000
VB   ...  
(1.10) 1 (1.10) 10 (1.10) 10
VB  $90.91  ...  $38.55  $385.54
VB  $1,000
INPUTS 10 10 100 1,000
N I/YR PV PMT FV
OUTPUT -1,000
Bond Valuation
Discount Bond - A bond that sells below its par value; occurs whenever the
going rate of interest is above the coupon rate.

Suppose inflation rises by 3%, causing rd = 13%.

INPUTS 10 13 100 1,000

N I/YR PV PMT FV

OUTPUT -837.21
Bond Valuation
Premium Bond - A bond that sells above its par value; occurs whenever the
going rate of interest is below the coupon rate.

Suppose inflation falls by 3%, causing rd = 7%.

INPUTS 10 7 100 1,000

N I/YR PV PMT FV

OUTPUT -1,210.71
 Bond Yields
The bond’s yield should give us an estimate of the rate of return we would
earn if we bought the bond today and held it over its remaining life.
Yield to Maturity - The rate of return earned on a bond if it is held to
maturity.
What is the YTM of a 14-year, 10% annual coupon bond, if par value = $1000
and $1,494.93 at price ?
0 1 2 14
YTM
...
VB = 1,494.93 $100 $100 $100 + $1,000
INPUTS 14 5 100 1,000

N I/YR PV PMT FV

OUTPUT -1,494.93
 Bond Yields
Yield to Call - The rate of return earned on a bond when it is called before
its maturity date.

N: the number of years until the company can call the bond
Call Price: the price the company must pay in order to call the bond (it is often set equal to the par value plus
one year’s interest)
rd: the YTC
What is the YTC of a callable bond with 10-year maturity, 10% annual coupon, if par
value = $1000 and $1,494.93 at price then interest rate had fallen after 1 year
0
issuance? 1 2 9
...
YTM

VB = 1,494.93 $100 $100 $100 + $1,100

INPUTS 9 4.21 100 1,100
N I/YR PV PMT FV
OUTPUT -1,494.93
Change in Bond Value Over Time &
Bonds With Semiannual Coupons
PRESENTED BY : RIZKI ANDISA PRANATA
Change in Bond Value Over
Time
● A. 15 years Bond, 10% annual coupon, issued at par = $1000, market
interest rate = 10%. coupon rate == market interest rate, trading at par.

● B. 5 years ago issued 20 years Bond with 7% annual coupon, originally

issued at par price. Now, coupon rate < market interest rate, they sell at
discount @ $771,82

● C 10 years ago issued 25 years Bond with 13% annual coupon, originally
issued at par price. Now, coupon rate > market interest rate, sell at
premium @ $1228,18

● A = new issue

● B & C = outstanding bond / seasoned issue.

Change in Bond Value Over
Time
From A, B, and C:
- 15 year maturity.
- Same market interest rate 10%.
- Have different price because of their different coupon rate.

Table 7.1 below will show :

- Different current yield
- Capital gain yields.
- Return over time. (Bond’s total return = current yield + capital gains yield. )
- Notes to table :
- absence of default risk
- market equilibrium == total return == yield to maturity == market interest rate
Change in Bond Value Over
Time
 Change in Bond Value Over
Time
● Bond A (10%) == Market Interest Rate (10%)
○ Current yield = 10%, no capital gain

● Bond B (7%) < Market Interest Rate (10%)

○ Current yield decline over time.
○ Capital gain rise over time.
○ Its price rise over time.

● Bond C (13%) > Market Interest Rate (10%)

○ Current yield rise per time.
○ Capital gain decline over time.
○ Its price decline over time.
Each bond provide investor with the same total return.
Bonds With Semiannual
Coupons
● Modify valuation model :
○ Annual coupon interest payment by 2
■ To determine dollars of interest paid each six months

○ Multiply the years to maturity by 2.

■ To determine the number of semi-annual periods.

○ Divide the nominal interest rate by 2.

■ To determine the periodic (semi-annual) interest rate.
Bonds With Semiannual
Coupons
Present Value :

Interest/Year :
Assessing a Bond's Riskiness
PRESENTED BY : RUDY CAHYONO PUTRO
Objectives
1. Identify and explain the two key factors that impact a bond’s riskiness
2. Comparing between Price Risk & Reinvestment Risk
3. Discuss how we can minimize these risks
1. Two key factors that impact a bond’s
riskiness
A. PRICE RISK or INTEREST RATE RISK
The risk of a decline in a bond’s price due to an increase in interest rates.
Interest rate risk is higher on bonds that have long maturities than on bonds
that will mature in the near future
The longer its maturity, the more its price changes in response to a given
change in interest rates
The higher the coupon rate, the shorter the duration
1. Two key factors that impact a bond’s
riskiness
A. PRICE RISK or INTEREST RATE RISK
1. Two key factors that impact a bond’s
riskiness
B. REINVESTMENT RISK
The risk that a decline in interest rates will lead to a decline in income from a
bond portfolio.
2. Comparing between Price Risk & Reinvestment
Risk
Price Risk Reinvestment Risk
Relates to the current market value of the Relates to the income the portfolio
bond portfolio produces
If holding long-term bonds, value of If holding long-term bonds, your income
your portfolio will decline if interest rates will be stable (not significant)
rise (significant interest rate price risk)
If holding short-term bonds, the If holding short-term bonds, the
influence of price risk is not significant influence of reinvestment rate risk is
significant

One way to manage both interest rate and reinvestment rate risk is to buy a zero
coupon Treasury bond with a maturity that matches the investor’s investment
horizon.
Valuing Bond
PRESENTED BY PARDIYO
VARIOUS TYPES OF CORPORATE BONDS :
MORGATE BONDS
A bond backed by fixed assets;
First morgage bonds are senior in priority to claims of second
mortgage bonds (junior)

INDENTURE >>> legal document

A formal agreement between the issuer and the bondholders
VARIOUS TYPES OF CORPORATE BONDS :
DEBENTURES >>> unsecured
A long term bond that is not secured by a mortgage on specific property

SUBORDINATED DEBENTURES >>> lnferior

Bonds having a claim on asset only after the senior debt has been paid in full
in the event of liquidation
Bond Rating & Rating Agency
BOND RATING :
Reflect their probability of going into default

RATING AGENCIES :
Moody’s
Standard & Poor’s
Fitch
PEFINDO (Indonesia) TCR (Thailand)
RAM (Malaysia) JCRA (Japan)
CDRA (China) KCRA (Korea)
Bond Rating & Rating Agency
BOND RATING :
Investment Grade : BBB up to AAA
Non Investment Grade / Junk Bond : lower than BBB

POJK 51/POJK.04/2015
Lembaga Pemeringkat Efek;
In depth analysis; independen, objective
The Determine Anchor Financial Risk Profile
Interest rate
Low High

Low

Interest rate

High
Valuing Bonds
Issuer Credit rating Analysis
Cash Flow/Leverage Competitive Risk Industry Country Risk

Porter Five Fources

Financial Risk
Business Risk
Profile

Anchor
Div Portofolio Effect Capital Structure Financial Policy Liquidity Management Comporable Rating
Analysis

Stand alone / Group / Government Influence

Issuer Credit
Rating
Spread Yield

Corporate Bonds

Yield spread

Rf = 5.5%

Government
Bonds

AAA BBB
Bankrupcy and Reorganization

Liquidation or
Reorganization Difference
?
Summary
a. Convertible Bond?
b. Premium Bond?
c. Indenture ?
d. Yield To maturity?
dst....