Bond valuation problems and solutions

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Bond

A bond is a security which gives fixed income. It is a debt instrument. Bonds created for raising business capital from the market. They have a loan agreement between the bond issuer and an investor. In the agreement, it is mentioned that the bond issuer is obligated to pay a specified amount to the investor at specified future dates.

Why the Company issue Bond?

It is difficult to large company to invest capital from own sources. A big company may collect money from a different combination. They collect from shareholders, bank load and issuing a bond in the market.

-For long term investment, a firm issuing a bond to collect money from the public. They issuing a bond at an interest rate.

-In the case of Bond, after maturity, the purchaser gives the principal amount.

– The interest rate may calculate either annually or semi-annually. It calls the coupon rate or coupon interest rate.

– The coupon rates are determined as a percentage of the bond’s par value.

For calculating bond value we need to know about coupon payment, Annuity factor, the Face value of the bond and Discount rate.

How much the face values of a bond?

Face value is a financial term which describes the nominal or dollar value of the bond. In the case of stocks, the face value is the original cost of the stock listed on the certificate. For bonds, Face value always $1000. It is not only for a specific country but it same worldwide

How can calculate coupon price/payment?

Coupon price= Face value x interest rate

Calculate Annuity factor

Bond valuation problems and solutions

Calculate Discount Factor

Discount factor

Also can read: How RRR and IRR helps to select a project

An example about take a decision where purchase the bond or not

XYZ company intense issuing a long-term bond for 10-year at a coupon rate of 12%, payable semi-annually or half-yearly. The required rate is 30%. The selling price par bond is $950. Should you purchase this bond?

Solution:

To take the decision whether you purchase the bond or not you must need to know the present value of that bond.  So, PV= CPx AF+FV x DF

CP=coupon payment

AF= Annuity factor

FV= Face value

DF= Discount rate

Here,

Calculate the amount by the above formula

AF=  = 11.08

DF= 0.311

CP= ($1000x .06) = $60

So, PV= CPx AF+FV x DF= $972.08

Decision

The present value of the bond is $972.018, and the selling price of the bond is $950. Therefore, the bond’s PV is higher than purchasing price that means that bond is profitable.

 

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