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    Bond Formula

    Uploaded by

    Emanuel Satya Wardhana
    This document discusses bond valuation formulas and concepts. It defines key terms like market interest rate, coupon rate, maturity, and par value. It then summarizes how premium bonds occur when market rates fall below coupon rates, causing bond values to rise above par value. Conversely, discount bonds occur when market rates exceed coupon rates, lowering bond values below par. The document also defines yield to maturity as the total yield earned if an investor holds a bond until maturity, and yield to call as the yield if a callable bond is sold before maturity. It provides examples to illustrate these bond valuation concepts.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Bond Formula

    Uploaded by

    Emanuel Satya Wardhana
    233 views3 pages
    This document discusses bond valuation formulas and concepts. It defines key terms like market interest rate, coupon rate, maturity, and par value. It then summarizes how premium bonds occur when market rates fall below coupon rates, causing bond values to rise above par value. Conversely, discount bonds occur when market rates exceed coupon rates, lowering bond values below par. The document also defines yield to maturity as the total yield earned if an investor holds a bond until maturity, and yield to call as the yield if a callable bond is sold before maturity. It provides examples to illustrate these bond valuation concepts.

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    This document discusses bond valuation formulas and concepts. It defines key terms like market interest rate, coupon rate, maturity, and par value. It then summarizes how premium bonds occur when market rates fall below coupon rates, causing bond values to rise above par value. Conversely, discount bonds occur when market rates exceed coupon rates, lowering bond values below par. The document also defines yield to maturity as the total yield earned if an investor holds a bond until maturity, and yield to call as the yield if a callable bond is sold before maturity. It provides examples to illustrate these bond valuation concepts.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    233 views3 pages

    Bond Formula

    Uploaded by

    Emanuel Satya Wardhana
    This document discusses bond valuation formulas and concepts. It defines key terms like market interest rate, coupon rate, maturity, and par value. It then summarizes how premium bonds occur when market rates fall below coupon rates, causing bond values to rise above par value. Conversely, discount bonds occur when market rates exceed coupon rates, lowering bond values below par. The document also defines yield to maturity as the total yield earned if an investor holds a bond until maturity, and yield to call as the yield if a callable bond is sold before maturity. It provides examples to illustrate these bond valuation concepts.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    BOND VALUATION

    BOND FORMULA:

    ( 1+ r d )

    BV =

    M
    N
    ( 1+ r d )

    t =1

    BV = INT ( PVIFA r

    rd
    INT
    N
    M

    :
    :
    :
    :

    d ,N ,

    ) +M ( PVIF rd, N )

    market interest rate


    coupon interest rate (coupon rate x par value)
    years of maturity
    par or face value

    Example:
    Calculate the VB for 15-years bond, which has $1000 face
    value, and provide the 10% of annual interest rate.
    Assume that the market interest rate is 10%.
    PREMIUM AND DISCOUNT BOND
    A. PREMIUM BOND:
    1. The VB of bond will far beyond its par value
    2. The cause is: the decreasing value of market interest
    rate bellow the coupon rate
    3. Example:
    Calculate the VB for 15-years bond, which has $1000
    face value, and provide the 10% of annual interest
    rate. Assume that the market interest rate is 5%.
    4. What is the logic behind the premium bond? Why
    when the market interest rate fell bellow the coupon
    rate the VB is increasing?

    B. DISCOUNT BOND:
    1. The VB of bond fell bellow its par value
    2. The cause is: the increasing value of market interest
    rate beyond the coupon rate
    3. Example:
    Calculate the VB for 15-years bond, which has $1000
    face value, and provide the 10% of annual interest
    rate. Assume that the market interest rate is 15%.
    4. What is the logic behind the discount bond? Why
    when the market interest rate increase beyond the
    coupon rate the VB is decreasing?
    BOND YIELDS
    A. YIELD TO MATURITY (YTM):
    1. Yield is different with coupon interest rate which is
    fixed
    2. The bond yield is vary resulting from bond price
    fluctuation in the bond market/capital market
    3. Yield to Maturity (YTM) means the total yield that will
    be gained, if the investor holds the bond until its
    maturity date.
    4. Hence, YTM will consist of: interest yield and capital
    gain yield
    5. Example:
    A 5-year bond provide with $1000 of face value, offer
    10% coupon interest rate. A year after the issues date
    the market interest rate increases up to 15%.
    Supposed the investor hold the bond until maturity,
    how many % is the yield that will be gain the
    investor?
    B. YIELD TO CALL
    1. YTC is the total yield gained from the bond if it is sold
    before its maturity
    2. It is possible for the callable bond, that is bond that
    can be drawn back by its issuer/company
    3. The bond is callable when the market interest rate
    decreasing

    a. It is benefited the issuer


    b. It is damaged the investor
    4. The callable bond need some agreements among the
    issuer and the investor:
    a. The issuer should pay the bond with the higher
    price than its face value, it is called Call Price

    b. The formula:

    ( 1+ r d )

    BV =

    Call Price
    N
    ( 1+r d )

    t =1

    N = grace period
    5. Example:
    A 5-year bond provide with $1000 of face value, offer
    10% coupon interest rate. A year after the issues date
    the market interest rate decreases up to 5%.
    Supposed the issuer call the bond at the price $1100
    at the 3rd year.

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