Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 6 Bond and Valuation (Definition bond (debt contract/ interest…
Chapter 6 Bond and Valuation
Definition bond
debt contract/ interest only loan
par value or face value, normally RM1000 for corporate bond
coupon rate= stated interest rate
coupon payment = Coupon rate x par value
maturity date = years until bond must be repaid
yield to maturity = the market required return for bond of similar risk and maturity.
Bond value
As interest rate increase, bond value decrease, vice versa.
Bond Price > Par Value = Premium Bond YTM < Coupon Rate = Premium Bond
Bond Price < Par Value = Discount Bond YTM>Coupon rate = Discount bond
interest rate risk
price risk
change in price due to change in interest
long term bond and low coupon rate bond; more price risk
reinvestment risk
uncertainty concerning reinvested rate
Short term bond and high coupon rate; more reinvestment risk
Debt vs Equity
Debt
not ownership
no voting right
interest is tax deductible
has legal course if default interest and principal payments
excess debt lead to financial distress
Equity
has ownership interest
has voting rights
dividend is not tax deductible
dividend is not compulsory until it is declared
has no legal recourse if dividend not declared
equity cannot go for bankruptcy
classification of bond
registered vs bearer
secure bond
collateral
mortage
unsecure bond
debenture
notes
seniority
Bond Rating
high grade
Moody's Aaa, Aa; S&P AAA,AA
Capacity to pay is very strong;extremely strong
Medium grade
Moody's A,Baa; S&P A, BBB
capacity is strong but more susceptible to change in circumstances
Low grade
Moody's Ba,B,Caa,Ca; S&P BB,B,CCC,CC
Considered speculative with respect capacity to pay
Very low grade
Moody's C,D; S&P C,D
no interest being paid; in default with principal and interest in arrears
Government Bonds
Municipal Bond
Debt of state and local givernment
interest exempted from state tax in issuing state
treasury
Treasury bills
maturity one year or less
Treasury notes
maturity between one to ten years
Treasury bond
maturity greater than ten years.
Federal Government bond
Zero coupon bond
make no periodic interest payments
formulae
inflation and interest rate
Fisher effect
