《Bond Valuation Guide》.pdf

Global Financial Management Bond Valuation Copyright 1999 by Alon Brav, Campbell R. Harvey, Stephen Gray and Ernst Maug. All rights reserved. No part of this lecture may be reproduced without the permission of the authors. Latest Revision: August 23, 1999 2.0 Bonds Bonds are securities that establish a creditor relationship between the purchaser (creditor) and the issuer (debtor). The issuer receives a certain amount of money in return for the bond, and is obligated to repay the principal at the end of the lifetime of the bond (maturity). Typically, bonds also require coupon or interest payments. Since all these payments are determined as part of the contracts, bonds are also called fixed income securities. A straight bond is one where the purchaser pays a fixed amount of money to buy the bond. At regular periods, she receives an interest payment, called the coupon payment. The final interest payment and the principal are paid at a specific date of maturity. Bonds usually pay a standard coupon amount, C, at regular intervals and this represents the interest on the bond. At the maturity of the bond, the final interest payment is made plus the principal amount (or par amount) is repaid. Some bonds do not make a coupon payment. These bonds are bought for less than their face value (we say such bonds are bought at a discount). Bonds that do not pay coupons are often called Zero Coupon Bonds. 2.1 Objectives At the end of this lecture you should be able to: 1 • Value a straight bond and a zero-coupon bond using present discounted value techniques • Understand the relationship between interest rates and bond prices • Understand the bond reportin