What is Bond – A pledge is a bond when a joint stock company sells a certain amount of debt or a pledge to raise capital on a long-term basis. In most cases, 10 to 30 year bonds are issued. Bonds are issued at par value or face value. It is also issued at a discount or premium. It is one of the sources of long-term financing.
According to James C. Van Horne and Wachowicz, “Bond is a long-term debt instrument issued by a company or government.” Bond is also called a bond. Interest is paid at a fixed rate on the bond.
According to Posley & Brigham, “A bond is a long-term contract under which a borrower agrees to make payments of interest and principal, on specific dates to the holders of the bond.” Agrees to pay interest and principal.
Classification Classification of Bond:
In this topic briefly Discuss the classification of bonds. Lets see Discuss the classification of bond:
A. On the basis of security: Bonds can be divided into two parts on the basis of security.
1. Secured Bond and
2. Unsecured Bond
1.Secured Bond: A bond issued by mortgaging the fixed assets of a company is called a secured bond.
2. Unsecured Bond: The type of bond issue in which no property is required to be mortgaged is called unsecured bond.
B. Bonds can be divided into two parts based on for maturities. Such as 1. Fixed term bonds and 2. Indefinite term or permanent bang
1. Bonds with Definite Maturity: Bonds which have a fixed maturity and the amount invested in such bonds is repaid on expiry of that maturity are called fixed term bonds.
2. Indefinite Term or Perpetual Bond This type of bond has no fixed term. In this case the money invested in the bond is not returned or repaid. This is why such bonds are also called permanent objects.
What is Valuation?
Valuation is the process of combining risk and income in valuing an asset. “Valuation is the process that links risk and return to determine the worth of an asset.” The main data in this evaluation process are assessment risk. The value of that property depends. In this case the cash flow can be:
(2) Semi-Annual and
Impact of Required Return on Bond Value:
Impact of Required Return on Bond Value When the expected income of a bond differs from the coupon rate, the difference between the value of the bond / written value may be due to
(1) change in the basic expenditure of the long-term fund or
(2) ) If the firm’s basic risk changes. When the rate of return is higher than the coupon rate, the value of the bond is less than its value.
Which we call sale at discount. But the opposite process in the process of selling bonds is called selling at premium.
Impact of Maturity on Bond Values:
Impact of Maturity on Bond Values If there is a difference between the expected earnings rate and the coupon rate, maturity has an effect on the bond price. At maturity, the unearned expected earnings and the changed expected earnings rate associated with the earnings rate and the value of the bond.
Behavior or Nature of Bond Prices:
Depending on the nature of the bond price, the expected rate of return and the interest rate of the bond (Coupon / Rate) is more or less, the nature or characteristics of the bond price are discussed below.
A. Discount Bond: If the Required Rate of Return is less than the coupon rate or interest rate of the bond, the bond is sold at a discount or less than the original written price. The difference between the written price and the current price is the amount of the bond discount. In a word, if a bond sells at a discount, then bond value Coupon rate.
B. Premium Bond: If the expected rate of return is higher than the coupon rate or interest rate of the bond, the value of the bond will be higher than the written price. The selling price of such bonds is higher than the written price. Premium is the difference between written price and bond price. In a word, if a bond sells at a premium, then Bond> Par and YTM <Coupon rate.
C. Bond at Par: The expected return or earnings rate and the interest rate on the bond will be equal to the written value and the value of the bond will be equal. Such bonds are sold at par. In other words, if a bolb sells of a premium, the bond value = Par and YTM = Coupon rate. – =
D. Interest Rate and Bond Value: When the interest rate increases, the expected rate of return also increases. Therefore, as the value of the bond decreases and the interest rate decreases, the value of the bond also increases. There is a reciprocal relationship between the interest rate and the value of the bond.
E. Longer of Maturity: The price also changes as the expected market rate of return changes. The amount of change in the value of the bond depends on the maturity of the term. The shorter the term, the lower the value of the bond and the longer the maturity of the bond.
What is Rate of Return / Yield:
In this topic we briefly Discuss What is the rate of return? Write the requirements. What is the rate of return? Write the importance of rate of return? lets see:
The expected rate of return or discount is determined keeping in view the level of risk associated with any security. The rate at which the discounted value equals the current value of the securities when the expected cash inflows are deducted is called the Yield of the security or the expected inter-return rate.
And when the intrinsic value and market value of a security are equal to each other, only then the expected rate of return of the investor is equal to the market rate of that security or market yield. Importance:
A. Yield is used to compare different types of securities cash flows, maturity and current value.
B. The payback rate plays an important role in determining the company’s future financing costs and overall capital expenditures.
What is Coupon rate?
The nominal interest rate of a bond is fixed and it is printed on the bond certificate. Its value is calculated on the face value. In a word, the issuer pays interest to the bond holder at the established rate, which is called coupon rate. For example, if the coupon rate is 12 per cent on the written value of a bond of Rs. 1,000.
Spot Interest Rate:
Spot Interest Rate I have already learned that no annual interest is paid on zero coupon bonds. Earnings from such bonds are discounts earned at the time of issue For example, a bond with a written value of 2 years or Face value Tk. 1,000 could be sold at 897.50 instead.
But on maturity, the bond holder has to pay Rs 1,000. This type of bond is called a pure discount bond or a deep discount bond. The rate of annual earnings received on this type of bond is called the spot interest rate. In other words, the spot interest rate is the rate of annual earnings earned on bonds for which the investor has only one cash inflow.
S. Kevin says, “Spot interest rate is the annual rate of return on a bond that has only one cash inflow to the investor.” Example: Consider a zero coupon bond whose face value is Tk. 1,000 and maturity period is 5 years. If the issue price of the bond is Tk. 519.37, compute the spot interest rate. Solution The Spot interest rate can be calculated as shown below:
Yield to call (YTC):
The value of a bond can be paid by the issuer to the issuer or investor before the expiration of some bonds, which is called an option. It is called a bond paid at a fixed price and on time. For example, an institution has issued some bonds for a period of 15 years. (On behalf of the issuer and the investor) The YTCI question is how do we calculate this yield.
Yield to Maturity on Bond (YTM):
The expected rate of return on a bond purchased at market price. Yield to Maturity on Bond (YTM) It is a rate of return by which investors earn income by buying bonds at a fixed price and holding them for a fixed period.
According to J. C. Van Horne and J. M. Wachowicz, “Bonds purchased at current market prices that will hold until maturity and the rate of return expected from them are called YTM on Bond. (YTM is the expected rate of return that an investor earns if they buy a bond at a specific price and hold it until maturity.) The current value of the discounted bond is equal to the current market value. When the value of the bond differs from its par value, then YTM also differs from the coupon rate.
Valuation of securities:
On the other hand, different types of securities such as common shares, preferred shares and bonds are examples of financial assets. That is why valuation of securities is essential. Intelligent investors want to know the actual value of the desired securities before making a purchase. The valuation is called a security valuation.
LJ. Gitman Tonpen is a process that links risk to any asset income. Valuation is the process that links risk and return to determine the worth of an asset. )
- Basic Elements (Basic Elements):
- Evaluate the security of the use of the concept of the value of money.
- Expected future cashflows or return
- (Total Timing)
- (Risk and expected rate of return)
A. Expected Future Cash Flows: The value of a security depends on how much of a stock, commodity, or security it will receive in the future.
B. Timing of the Return We know that the valuation of money is used in the valuation of securities, so the amount of money to be paid is not the main consideration. How many years later or in which year it will be found is a matter of consideration.
C. Risk and Rate of Discount significantly affect the value of risk flow. And the discount rate also depends directly on the level of risk.
Importance of Securities Valuation:
In this topic briefly Discuss the security assessment. Discuss the importance of valuation of securities, lets see:
Importance of Securities Valuation For both the issuing company and the investor, security is very important. Which are as follows:
1. The real value of a security is determined by the security valuation.
2. It is possible to know whether there is any security Bruna Luck at the contemporary market price only through security evaluation.
3. A security appraisal is very important for determining the amount of a loan when it comes to borrowing or lending.
4. Security assessment is required in case of transfer of ownership.
5. In case of conversion of preferred shares (convertible) to ordinary shares, valuation of priority shares and common shares is required. .
6. In order to know the rate of return (Yield) in case of purchase of securities at market price, security
7. Security needs to be assessed in case of merger, conversion or sale of companies. .
8. Evaluation is vital for measuring the level of risk in maximizing market value.