Bond Valuation: Pricing Bonds by Prof. Darryl Gonzaga

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Questions and Answers

What is bond valuation primarily concerned with?

Estimating the coupon rate of a bond

Calculating the bond's cash flow and present value of future interest payments (correct)

Predicting the market conditions of a bond

Determining the current price of a bond

Which term refers to the fixed percentage of a bond's face value that a bondholder receives as interest payments?

Maturity date

Coupon rate (correct)

Discount rate

Current price

What must the bond's issuer do once the maturity date is reached?

Reduce the interest payments

Increase the face value of the bond

Extend the maturity date

Pay the bondholder the full face value of the bond (correct)

How often are interest payments typically made to bondholders?

Semiannually Signup and view all the answers

Which factor influences whether a bond's current price is at, above, or below its face value?

The market conditions Signup and view all the answers

What does par value refer to in bond valuation?

The bond's value once it matures Signup and view all the answers

What is the purpose of bond valuation?

To determine the fair price of a bond Signup and view all the answers

Why do companies issue bonds?

To finance projects and raise capital Signup and view all the answers

What does a bond represent?

A loan made by a creditor to a bond issuer Signup and view all the answers

Why do investors purchase bonds?

For stable and predictable income compared to stocks Signup and view all the answers

What happens if a bond is held until it matures?

The investor earns back the entire principal amount Signup and view all the answers

Which entities issue bonds to raise capital?

Companies, municipalities, states, and sovereign governments Signup and view all the answers

What is the present value of an asset based on in finance?

Its discounted cash flows Signup and view all the answers

What does 'Indenture' refer to in finance?

A legal and binding agreement between parties Signup and view all the answers

What is needed to calculate the price of a bond?

The face value and annual coupon rate Signup and view all the answers

What does the annual coupon rate of a bond represent?

The annual income from the bond Signup and view all the answers

In bond valuation, what does the semi-annual coupon payment depend on?

The coupon rate and face value Signup and view all the answers

How is the semi-annual coupon amount calculated for a bond?

$5k x 2% Signup and view all the answers

Study Notes

What is a Bond?

A bond is a type of debt instrument that represents a loan made by a creditor to a bond issuer (typically a government or corporate entity).
The issuer borrows funds for a defined period at a variable or fixed interest rate.
Bonds are issued by companies, municipalities, states, and sovereign governments to raise capital and finance projects, activities, and initiatives.

Importance of Bond Valuation

Bond valuation is the process of determining the fair price, or value, of a bond.
Knowing the fair value of a bond is essential to determine whether it is a good investment.

Steps to Price a Bond

Determine the face value, annual coupon, and maturity date of the bond.
Identify the bond's face value, or par value, which is the bond's value upon maturity.
Identify the bond's annual coupon rate, which is the annual income expected from the bond.
Determine the bond's maturity date.

Bond Valuation: An Example

A 10-year treasury bond with a par value of P500,000 and a 2% coupon rate would have an annual interest payment of P10,000 and a semi-annual coupon of P5,000.

Key Concepts in Bond Valuation

Maturity date: The length of time until the bond's principal is scheduled to be repaid to the bondholder.
Coupon rate: The interest payments that a bondholder receives, typically represented as a fixed percentage of the bond's face value.
Current price: A bond's current value, which may be at, above, or below par value depending on market conditions.

Importance of Bond Valuation to Investors

Bonds offer investors a predictable and stable income compared to other investment vehicles.
If a bond is held until maturity, the bondholder will earn back their entire principal, making bonds a way to preserve capital while earning a profit.

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Description

Learn about bond valuation and how to price a bond in the global financial market. Understand the significance of bonds in capital raising and investment. Explore the concept of bonds and their role in the financial sector.