Chapter 5 bonds and their valuation

Bond valuation pdf

Characteristics of Bonds Par value: the stated face value of the bond. See next slide. Pre-tax cost of debt YTM is a pre-tax cost of debt. Bond and their Valuation"— Presentation transcript: 1 Ch 5. That helps the issuer but hurts the investor. First mortgage bonds are senior in priority to claims of second mortgage bonds. But not good for investors if rates decline after issuance. If a company has this risk, it needs to pay a high interest. Whether collateral has been pledged will produce different types of bonds. Use open market purchase if r d is above coupon rate and bond sells at a discount. Debenture: a long term bond that is not secured by a mortgage on specific property. The procedure resulting from selling these bonds will be used for corporations. Generally fixed. More… 5 5 Maturity: Years until bond must be repaid. Four main types of bonds, depending on issuers: 1 Treasury bonds: bonds issued by the federal government, no default risk 2 Corporate bonds: bonds issued by corporations, default risk 4 3 Municipal bonds: bonds issued by state and local governments, default risk, interests earned are exempt from federal taxes and state taxes 4 Foreign bonds: bonds issued by either foreign governments or corporations 2.

Sells at a premium. Bond spread. The risk that CFs will have to be reinvested in the future at lower rates, reducing income. Buy bonds on open market.

Goals To discuss the types of bonds To understand the terms of bonds To understand the types of risks to issuers and investors To understand the changes of value 3 I. It relates to LBO market in s. Bankruptcy and Reorganization When a business becomes insolvent, a firm have to make a decision whether it will restructure Ch11 or liquidate itself Ch7. Could raise money by selling new bonds which pay 7. This makes them more willing to participate in reorganization even though their claims are greatly scaled back. A failure to meet the sinking fund requirement constitutes a default. Therefore, borrowers are willing to pay more, and lenders require more, on callable bonds. YTM is the rate of return earned on a bond held to maturity. Default risk: Risk that issuer will not make interest or principal payments. Long term bonds are exposed to interest rate risks, compared to short term bonds. Most bonds are owned and traded by large financial institutions. Most bonds have a deferred call and a declining call premium. But bonds are often not callable until several years after issues — deferred call call protection. Similar to amortization on a term loan.

Municipal bond insurance: an insurance company guarantees to pay the coupon and principal payments if an issuer defaults.

Characteristics of Bonds Par value: the stated face value of the bond. It include restrictive covenants. Default Risk: Risk of not paying promised amounts 5. Subordinated debenture: a bond paying a claim on assets only after the senior debt has been paid off in the event of liquidation.

This makes them more willing to participate in reorganization even though their claims are greatly scaled back. Default risk: Risk that issuer will not make interest or principal payments.

Bond and their Valuation 2 1.

bond valuation exercises with solutions pdf

Most bonds have a deferred call and a declining call premium.

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1 Chapter 5 Bonds, Bond Valuation, and Interest Rates.