# Category Archives: VALUATION OF BONDS AND SHARES

## Yield to Maturity (YTM)

Yield to Maturity (YTM) The YTM is the rate of return that investors earn if they buy a bond at a specific price and hold it until maturity. It assumes that the issuer of the bond makes all due interest payments and repayments of principal as contracted/promised. The YTM on a bond whose current price equals its par/face value (i.e. purchase price  maturity value) would always be equal to its coupon intere

## Changing Required Returns

Changing Required Returns The shorter the time period until a bond's maturity, the less responsive is its market value to a given change in the required return. In other words, short maturities have less interest rate risk than do long maturities when all other features, namely, CR, par value and frequency of interest payment, are the same. To illustrate, the results relating to the bonds values for various re

## Constant Required Returns

Constant Required Returns In such a situation the value of the bond would approach its par value as the passage of time moves the value of the bond closer to maturity.

## Impart of Maturity on Bond Value

Impart of Maturity on Bond Value When the required return (RR) is different from the coupon rate of interest (CR), the time to maturity would affect value of bonds even though the RR remains constant till maturity. The relationship among (i) time to maturity, (ii) the RR and (iii) the bond value are related to (a) constant RR and (b) changing RR.

## Impact of Required Return on Bond Values

Impact of Required Return on Bond Values When the required return on a bond differs from its coupon rate, the value of a bond would differ from its par/face value. The reason for the differences in the required return and the coupon interest rate may be of change in the basic cost of long-term funds or (ii) change in the basic risk of the firm. When the required return (RR) is more than the coupon rate of inter

## Basic Bond Valuation (Example)

EXAMPLE For the data given above and assuming interest is paid annually, compute the value of the bond Solution The bond value is equal to the par value. As a general proposition, when the required return is equal to the coupon rate, the bond value equals the par value. However, the market value of the bond is rarely equal to its par value. Several external factors over which bondholders or issuers have no co

## Basic Bond Valuation

Basic Bond Valuation The value of a bond is the present value of the contractual payments its issuer (corporate) is obliged to make from the beginning till maturity. The appropriate discount rate would be the required return commensurate with risk and the prevailing interest rate. Symbolically, where B = value of the bond at 1 = 0 t = annual interest paid n = number of years to maturity (term of the bond) M =

## VALUATION OF BONDS/DEBENTURES

VALUATION OF BONDS/DEBENTURES A bond/debenture is a long-term debt instrument used by the government/government agency (ies) and business .enterprises to raise a, large sum of money. A detailed account of the main attributes of bond. Most bonds, particularly corporate bonds (i) pay interest half-yearly (semi-annually) at a stated coupon interest rate, (ii) have an initial maturity of 10-years and (iii) have a

## BASIC VALUATION MODEL

BASIC VALUATION MODEL The value of an asset/security is the present/discounted value of all future cash flows (returns) associated with it over the relevant/specified period. The expected returns (cash inflows) are discounted, using the required return commensurate with the risk of the asset as the appropriate discount rate. Symbolically, where F= value of the asset/security at time zero.(t = 0) A1 = cash flow

## VALUATION OF BONDS AND SHARES

VALUATION OF BONDS AND SHARES INTRODUCTION Valuation is the process that links risk and return to determine the worth of an asset. It can be applied to expected benefits from real/physical as well as financial assets/securities to determine their worth at a given point of time. This Chapter focusses on valuation of two financial assets, namely, bonds/debentures and shares, ordinary as well as preference. To val