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Securities and Portfolio Management: External Presentation On Bond Value Theorems

The document provides information about bond valuation theorems. It discusses that bond valuation is the process of determining the fair price of a bond based on factors like interest rates, bond payments, and time periods. It describes the discounted cash flow method as one of the most widely used methods to value bonds. It also discusses five bond valuation theorems - the value of a bond depends on the coupon rate, years to maturity, and required yield; a rise in bond price for a decline in yield is greater than the fall in price for a rise in yield; the change in price is less for a percentage change in yield if the coupon rate is higher; and convexity measures the curvature in the relationship between bond prices and yields.

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82 views15 pages

Securities and Portfolio Management: External Presentation On Bond Value Theorems

The document provides information about bond valuation theorems. It discusses that bond valuation is the process of determining the fair price of a bond based on factors like interest rates, bond payments, and time periods. It describes the discounted cash flow method as one of the most widely used methods to value bonds. It also discusses five bond valuation theorems - the value of a bond depends on the coupon rate, years to maturity, and required yield; a rise in bond price for a decline in yield is greater than the fall in price for a rise in yield; the change in price is less for a percentage change in yield if the coupon rate is higher; and convexity measures the curvature in the relationship between bond prices and yields.

Uploaded by

Gaurav
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Securities And Portfolio Management

External Presentation on Bond Value


Theorems
SUBMITTED TO: SUBMITTED BY:
Ashish Sengar
Dr. Vivek Sharma
Devank Mathur
Gaurav Bajaj 1121213525
Khushi Agrawal
Mansha Solanki 1121214248
BONDS:

• Bonds are a type of debt instrument that stand in for loans given to the issuer. Bonds are a frequent
tool used by enterprises and governments (at all levels) to borrow money.
• In exchange for regular interest payments, a bondholder loans money to a business or the
government for a predetermined length of time. When the bond matures, the bond's issuer pays the
investor their money back. Since your investment will generate fixed payments for the duration of
the bond, the term "fixed income" is frequently used to characterise bonds.
TYPES OF BONDS:

BONDS

BASED ON BASED ON BASED ON


COUPON OPTION REDEMPTION
BOND VALUATION 
• Bond Valuation Is The Process Of Determining The Fair Price, Or Value Of A Bond. It Is a Process Of Determining the
Fair Market Price Of The Bond Based On Factors Such As Interest Rates, Bond Payments and Time Periods. Bond
Valuations Assist An Investor In Deciding Whether The Future Yields From The Bond Investment Are Suitable For Their
Portfolio.
• The Discounted Cash Flow Method Is One Of The Most Widely Used Methods To Value A Bond.

• The Variables Affecting The Value Of The Bond Include:

 Par Value — The Final Principal Amount Repaid At The Maturity Time. It Is Also Known As Face Value.
 Coupon — Periodic Payments On The Bond. These Might Be Fixed Or Variable. A Coupon Is Not Provided For A Zero-
coupon Bond.
 Time To Maturity — The Time Period Until Maturity. Bonds May Receive Coupons Periodically During This Time. At
The End Of The Time To Maturity, The Principal Is Repaid.
 Interest Rate — The Market Rate Of Interest Applicable To The Bond.
BOND PRICING
The price of a bond can be determined by following a few steps :

1. Determining the Face Value, Annual Coupon, and Maturity Date

• Determine 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 one can expect to receive from the bond.
• Lastly, determining bond’s maturity date.

2. Calculate Expected Cash Flow

Next, calculating cash flows using the bond’s face value, annual coupon, and maturity date.

Cash Flow = Annual Coupon Rate x Face Value

3. Discount the Expected Cash Flow to the Present

After calculating cash flow, we will discount the expected cash flow to the present.

Cash Flow ÷ (1+r)t

In the above formula, “r” represents the interest rate, and “t” represents the number of years for each of the cash flows.
BOND
VALUE The Value of the Bond depends upon
THEOREMS: three factors, namely:-

1. The coupon rate.


2. Years to Maturity.
3. The expected yield to maturity or the required rate
of return.
THEOREM 4 :

 Theorem 4 states that a rise in the bond's price


for a decline in the bond's yield is greater than
the fall in the bond's price for a rise in the
yield.
EX: A BOND WITH FACE VALUE OF RS. 100 WITH COUPON
RATE OF 10% AND MATURITY OF 5 YEARS.

CASE 1: IF THE YIELD DECLINES BY 2%.

CASE 2: IF THE YIELD INCREASES BY 2%WHAT WILL BE


THE IMPACT OF IT ON BOND PRICE?
Case 1:-
Decrease in yield by 2%Va= 10 (PVIFA 8%,5 Years)
+ 100(PVIF 8%, 5 Years)= 10 x 3.993 + 100 x
0.681 = Rs.39.93 + Rs. 68.10 = Rs. 108.03
108.03 - 100 = 8.03
Case 2:-
Increase in yield by 2% .V₁ = 10 (PVIFA 12%,5
Years) + 100(PVIF 12%, 5 Years)= 10 x 3.605 + 100 x
0.567= Rs.36.05+ Rs. 56.70 Rs. 92.75
100 – 92.75 = 7.25
THEOREM 5:

Theorem 5 states that the


change in the price will be less
for a percentage change in the
bond's yield if its coupon rate is
higher.
FACTORS BOND X BOND Y
Coupon Rate 10% 8%
Yield 8% 8%
Maturity Period 3 Years 3 Years
Price (Current Price) 105.15 100
Face value 100 100
Yield Increase 1% 1%
Price after yield increases 102.51 97.47
Percentage change in price 2.4% 2.53%
CONVEXITY

• Convexity is a measure of the curvature in the relationship between bond prices and bond
yields. According to theorem 4 the relationship is not linear. The quantum increase in the
bonds price for a given decline in the yield is higher than the decline in bonds price for a
similar amount of increase in bonds yield. Hence, the relationship is not linear. This
relationship is often referred to convexity.
Convexity Curve:-
THANK YOU!

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