Bonds (Debentures)

                 Bond are also termed as debentures. They are negotiable promissory notes that can be used by corporate, institutes or government agencies to raise funds from investors. it has the following features:-

• It is acknowledgement of debt
• It is convertible into equity at a later stage
• Redeemable at the time of maturity
• Secured instrument for raising debt against collateral
• Issuer can be the corporate or /and the government agencies.

Terms to remember

• Face value:- (Par value) It is the value on the face of the bond. It represents the amount of money, the person borrows and promises to repay at the time of maturity. A bond may be issued at par, at premium or at discount.
• Coupon rate:- It is the specific interest rate, payable to the bondholder on the par value irrespective of the price of issue.
• Maturity period:- It is the number of years after which the par value is payable to the bond holders. thus bond holder will receive redemption value at the time of maturity.
• Market Value:- A bond may be traded in a stock exchange. Market value is the price at which the bond is usually sold or purchased in the market.

Methods of Valuation of Bonds

Basic bond valuation model:- 

            The value of a bond is the present value of the payments its issuer will make to the bond issue from time to time till its maturity. The discounting rate to arrive at the present value depends on the risk and prevailing interest rate. It is also the required rate of  rerun on the bond. 

Payments to bond holder are

• Interest earned every year in form of annuity
• Par value at time of maturity i.e., redemption value

Bond value with semi-annual Interest

Some of the bonds carry interest payment semi-annually. Annual interest payment is halved,number of years to maturity will be doubled to get the number of half-yearly periods. Discount rate has to be divided by two to get the discount rate for half-yearly period.

Zero Coupon Bonds

Bonds which do not make periodic interest payments are zero coupon bonds. their coupon rate is zero. The return to the investor consists of the difference between the redemption value of the bond on the maturity  date and the 'below face value' at which he purchases it. Its valuation can be done as