File Name: valuation of bonds and debentures .zip
Debentures enjoy the benefits of both debt initially and equity later. The terms of conversion will decide the pricing of these convertibles, which is left to free market forces in India, now. Why Convertible Financing? Preferred shares have the qualities of stocks and bonds, which makes their valuation a little different than that of common shares. The owners of preferred shares are part owners of the company in proportion to the held stocks, just like common shareholders.
Bonds and their variants such as loan notes, debentures and loan stock, are IOUs issued by governments and corporations as a means of raising finance. They are often referred to as fixed income or fixed interest securities, to distinguish them from equities, in that they often but not always make known returns for the investors the bond holders at regular intervals. These interest payments, paid as bond coupons, are fixed, unlike dividends paid on equities, which can be variable. Most corporate bonds are redeemable after a specified period of time. This article, the first of two related articles, will consider how bonds are valued and the relationship between the bond value or price, the yield to maturity and the spot yield curve. As with any asset valuation, the investor would be willing to pay, at the most, the present value of the future income stream discounted at the required rate of return or yield.
A bond or a debenture is a long-term debt instrument or security. It is issued by business enterprises or government agencies to raise long-term capital. A bond usually carries a fixed rate of interest. It is called as coupon payment and the interest rate is called as the coupon rate. The coupon payment can be either annually or semi-annually. A bond can be irredeemable or redeemable. Redeemable bonds have a fixed maturity date and irredeemable bonds have perpetual life with only interest payments periodically.
Bond valuation is the determination of the fair price of a bond. As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate. Hence, the value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate. In practice, this discount rate is often determined by reference to similar instruments, provided that such instruments exist. Various related yield-measures are then calculated for the given price.
Understand the role of stocks and bonds in the financial markets. 2. Calculate value of a bond and a share of stock using proper formulas. Acquisition of Capital.Reply
In the remainder of this chapter we'll look closely at the valuation of bonds and then at their Debentures can be subordinated to specific issues or to all.Reply