Bonds are the important source for borrow for investment in their business.here in this side we discuss about how to valuate bonds and share

1. VALUATION OF BONDAND
SHARES
Prepared By
ShashwatVishwakarma
11304305

2. Valuation of Bonds
■ What is a Bond?
- It is a legal contract in which borrower agrees to give the principle amount and
interest in a specific time to the holder of the bond.
- Bonds are Long-term debt (Debt security) taken by a borrower(can be government or
institute or corporation or federal agency or other organisation ) and is obliged to pay
interest on principle amount and principle amount on later date which is specified
(Note – Specified date is agreed upon by both Borrower of bond and holder of bond).
- Bonds hold opportunity – but, like all investments, they also carry risk.

3. Types of Bonds
■Bonds with Maturity
■Pure Discount Bonds
■Perpetual Bonds

4. Bond with Maturity
■ The bond issuer also agrees to repay you the original sum loaned at the
bond’s maturity date.
■ This is the date on which the principal amount of a bond is to be paid in full.
■ A bond’s maturity usually is set when it is issued.
■ Maturity date is the date on which the principal amount of a note, draft, acceptance
bond or another debt instrument becomes due and is repaid to the investor and
interest payments stop.
■ It is also the termination or due date on which an instalment loan must be paid in full.

5. Yield to Maturity
■ Yield-to-Maturity (YTM) is the rate of return you receive if you hold a bond to
maturity and reinvest all the interest payments at theYTM rate.
■ It is calculated by taking into account the total amount of interest you will receive over
time, your purchase price (the amount of capital you invested), the face amount (or
amount you will be paid when the issuer redeems the bond), the time between
interest payments and the time remaining until the bond matures.

6. Formula to calculateYield of Maturity(YOM)
C = Coupon / Interest Payment
A= FaceValue
P=Price
n =Years to maturity

7. Bonds Coupons
■ A bond’s coupon is the annual interest rate paid on the issuer’s borrowed money,
generally paid out semi-annually on individual bonds.
■ The coupon is always tied to a bond’s face or par value and is quoted as a percentage
of par.
Example - Say you invest Rs 6,000 in a six-year bond paying a coupon rate of five percent
per year, semi-annually. Assuming you hold the bond to maturity, you will receive 12
coupon payments of Rs 150 each, or a total of Rs 1,800.

8. BondYield
■ Yield is a general term that relates to the return on the capital you invest in a bond.
You hear the word “yield” often with respect to bond investing.
■ There are, in fact, a number of types of yield.The terms are important to understand
because they are used to compare one bond with another to find out which is the
better investment.
■ Following are the types of BondYield
(1) CouponYield
(2) CurrentYield

9. CouponYield
■ Coupon yield is the annual interest rate established when the bond is issued.
■ It’s the same as the coupon rate and is the amount of income you collect on a bond,
expressed as a percentage of your original investment.
■ Example - If you buy a bond for Rs1,000 and receive Rs45 in annual interest payments,
your coupon yield is 4.5 percent.This amount is figured as a percentage of the bond’s
par value and will not change during the lifespan of the bond.

10. CurrentYield
■ Current yield is the bond’s coupon yield divided by its market price.
■ To calculate the current yield for a bond with a coupon yield of 4.5 percent trading at
103 (Rs1,030), divide 4.5 by 103 and multiply the total by 100.You get a current yield of
4.37 percent.
■ Say you check the bond’s price later and it’s trading at 101 (Rs1,010).The current yield
has changed. Divide 4.5 by the new price, 101.Then multiply the total by 100.You get a
new current yield of 4.46 percent.
■ Note - Price and yield are inversely related. As the price of a bond goes up, its yield
goes down, and vice versa.

11. Pure Discount Bonds
■ A type of security that pays no income until maturity; upon expiration, the holder receives
the face value of the instrument. The instrument is originally sold for less than its face value
(at a discount)
■ Bonds that don’t make regular interest payments are called zero-coupon bonds – zeros,
for short. As the name suggests, these are bonds that pay no coupon or interest. Instead of
getting an interest payment, you buy the bond at a discount from the face value of the
bond, and you are paid the face amount when the bond matures. For example, you might
pay Rs.3,500 to purchase a 20-year zero-coupon bond with a face value of Rs10,000.
Mathematically,
Value of pure discount bond =Present value of the amount on maturity

12. Perpetual Bond
■ Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no
maturity date.Therefore, it may be treated as equity, not as debt.
■ Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the
principal.
■ Perpetual bond cash flows are, therefore, those of a perpetuity.
■ Mathematically,
PV = A / r
were P = Present value of Perpetuity
A= Amount of periodic payment
r= yield, discount rate or interest rate

13. Valuation of Perpetual Share
■ Preference Shares are issued by corporations or companies with the primary aim of
generating funds.
■ A preference share usually carries a fixed stated rate of dividend.The dividend is payable
only upon availability of profits.
■ In case of cumulative preference shares, arrears of dividends can be accumulated and in
the year of profits common stock holders can be paid dividend only upon settlement of all
the arrears of cumulative preference dividends.
■
Preference share holders have preference right over payment of dividend and settlement
of principal amount upon liquidation, over common share holders.
■ A preference share can be irredeemable or redeemable. Redeemable preference shares
have a fixed maturity date and irredeemable preference shares have perpetual life with
only dividend payments periodically upon profit availability.
■ Preference shares can also be cumulative and non-cumulative.

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