MODULE VI: BOND VALUATION INTRODUCTION When valuing a financial asset, a bond or a stock, the pricing principle is generally the value of all cash That is, the intrinsic value of an asset is simply the Present is called the flows that it generate in the This kind of technique to collect Cash Flow There are two three things that need for the DCF model: Cash flows, (2) time duration, and G) discount rate. BOND VALUATION The cash flows from a specific bond depend on its contractual features. Literally, a bond is a long-term contract under which the issuing company agrees to make payments of principal, on specific dates, to bolders the bond. The principal amount par value is usually si,000 and interest payments are normally made twice a year. Since the principal and the interest payment are fixed, the value or current market price of the bond may fluctuate over its life as interest rates change- The equation used to find the value of an annual coupon bond is: (+i) +i) where C dollars of interest paid each year. the bond’s market interest rate; F the par value of the bond-$1,000, and the number of years to maturity. Excel Pva. N, PMT, Fv, type) where I i, PMT-C, Fv F, and type 0. The above formula is for bonds that pay interest annually. To adjust for semi-annual interest payments, the inputs for the formula become: Excel: Pva, N, PMIT, Fv, type) where I i2, N 2n, PMT Cl2, FV F, and type 0. Example 1: A corporate bond carries a par value of si,000 and a coupon rate of 15 percent with 14 years to maturity. If the current interest rate for this bond is 10 percent, what is the market price of this corporate bond? Answer: i 0.1, n 14, C-15% 1.000 150, F-1,000, type-0
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