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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 par/face value of Rs 1,000 that must be repaid at maturity. Par value is the value on the face of the bond. It represents the amount the entity borrows and promises to repay at the time of maturity. Coupon rate is the specified interest rate. The interest payable to the bondholder is equal to par value x coupon rate. Maturity period refers to the number of years after which the par value is payable to the bondholder. To illustrate, a firm has issued a 10 per cent coupon interest rate, 10-year bond with a Rs 1,000 par value that pays interest semi-annually. A bondholder would have the contractual right to (1) Rs 100 annual interest (0.10, coupon rate interest x Rs 1,000, par value) paid as Rs 50 x Rs 100) at the end of every 6 months and (2) Rs 1,000 par value at the end of the year. We illustrate in this Section the valuation of bonds with reference to (i) basic bond valuation, (ii) yield to maturity, and (iii) semi-annual interest and bond values.

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