Bond Valuation Basics - CA Final SFM (New Syllabus) Classes & Video Lectures

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Meaning of Bonds
When a company has to raise long term debt, one of the modes of raising the funds is by issuing debentures. For all practical reasons, a debenture and a bond are one and the same.
Bonds or debentures can be called financial Instruments which are contracts that give rise to a financial liability for one party (the one who issues such bonds) and a financial asset for the other party (the one who holds such bonds or debentures). Bond is a fixed income bearing security that provides interest at a definite rate to the investors.
When an investor acquires a bond, he expects interest over the period and the redeemable value to be received at the maturity date or redemption date. In other word, after acquiring a bond, the investor receives a stream of cash flows. The total present value of such stream of cash flow (including the present value of redeemable value) is considered as the value of such bond.
For the purpose of bond valuation the following terms must be clarified:
1. Face Value
2. Coupon Rate
3. Coupon payments
4. Issue Price
5. Market Price
6. Maturity Date
7. Redemption Price
8. Intrinsic Value
9. Callable & Puttable Bonds
10. Call Date & Call Price
11. Current Yield
12. Yield to Maturity (YTM)
13. Yield to Call (YTC) (For Callable Bonds)
14. Zero Coupon Bonds (ZCB)
15. Deep Discount Bonds (DDB)
16. Annuity Bonds
17. Bond STRIPS
18. Par Bonds, Premium Bonds and Discount Bonds
19. Convertible Bonds (OCDs & CCDs)
20. Straight Value of Convertible Bond
21. Stock Value of Convertible Bond
22. Conversion Parity Price
23. Conversion Premium
24. Clean Price & Dirty Price
Issue Price of a bond is at which a new bond is priced by the issuer. Bonds can be issued at Par, Premium or Discount.
Market Price of a bond indicates the price at which the bond can be bought or sold in the open market.
What do you mean by Coupon Rate and Coupon Payments?
Suppose a bond promises to pay interest at the rate of 8% per annum, then such rate is called “Coupon Rate”. The Coupon Rate is always applicable on the face value of the bond irrespective of its issue price or prevailing market price. For example, 9% Government of India Bonds provide half yearly interest on 30th June and 31st December. The face value of the bond is ` 1,000. The interest paid on each bond will be ` 1,000 x 9% x 6/12 = ` 45 on each of the interest payment dates. The interest payment of ` 45 during each of the months June and December are known as “Coupon Payments”.
Coupon Rate is the rate of interest attached to the bond and it applies on the face value, for example, a 9% bond with face value of ` 1,000 will have interest payments of ` 1,000 x 9% = ` 90 every year. It should be noted that the interest on bonds can be payable quarterly, half yearly or annually in general.
What is the Intrinsic Value of the Bond?
Intrinsic value of the bond is the aggregate present value of all coupon payments and the redemption amount, determined by using a discounting rate which is expected rate of return by the investor.
Maturity Date of a bond is the date at which a bond is redeemable or is due for redemption. A bond is generally redeemed at par or premium.
Bond Valuation: Basic Principle
As discussed earlier, the present value of the stream of cash flows including the present value of the redemption price is considered as the value of the bond and more specifically the intrinsic value of the bond or the fair market value of the bond (For this purpose the market price of the bond is always called as Actual Market Price and not Fair Market Price).
In order to arrive at the present value of the stream of cash flows, a discounting rate has to be used. This discounting rate is known as the desired yield rate or required yield rate. In other words the discounting rate is the required rate of return by the investor.
As generally known, increasing the discounting rate results into reduction in present value, and the decrease in discounting rate increases the present value. It can be concluded that the discounting rate or the desired yield rate and bond value are inversely related.
Face Value; Intrinsic Value & Market Value:
(Classification of the bond as Par, Premium or Discount bond)
At the time of issue:
If the bond is issued at its face value it is par bond
If issued above its face value it is premium bond
If issued below its face value it is discount bond
Once the bond is floated:
Then comparison is made among the three values:
• Face Value
• Intrinsic Value and
• Market Value.
#Bonds , #Finance , #CAFinal , #FinancialLearning , #CAFinalSFM , #StrategicFinancialManagement , #SFM ,

[@NikhilJobanputra]

Please find and watch the English Version of this video in the link given:
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[@rashmihuddar1551]

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[@ShailendraKumar-bx8fg]

Best explaination i have ever found till date for the explanation of the bond. Please make videos on CDS , IRS , SWAPTION, SWAPTION STRADDLE, SWAPS also including the calculation which we do in the investment banking work. It will be helping us lot.
Thanks again for sharing this video. My best wishes for you

[@hifi.880]

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[@saadishtiaq6870]

Sir Ji, Thanks alot.
After 3 days of struggle final my concepts are cleared because of this video.

[@syed_hussaini]

I don't have words to express how precisely & conceptually you teach us through each & every video. Thanks a ton Guruji.

[@PoojaChoudhary-sj7sb]

Sir I was looking for a clear concept on bond basics for a long time and now I understood the same after watching your video .....thank you so much

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sir your teaching style is excellent . It helps me good idea for developing my knowledge .

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I get understand without writing even single word....

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I don't understand why my college prof not teaching in this way

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Thanks u so much sir ..... this video is helpfully

[@realtyoflife6624]

Thank you sir aapne bahut easy way topics ko clear kiya

[@joyceannpalma3951]

Can you make an example of bond valuation encompassing without change in the going interest rate and when there is decrease and increase of on going interest rate?

[@salahuddinqasim2321]

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[@akashbavishi6615]

Which one is more expensive?
Callable bonds or delisting of share??

[@sandeshneupane9088]

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You give true concept

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You are so crisp and clear with the concepts. Thanks a million Sir

[@NikhilJobanputra]

You are most welcome

[@ridergyaninabakhati2372]

wow sir...I finally understood the terms but where is the next part sir?? Could you please provide me the link of next video.....Lots of love from Nepal sir ...Thank you for this video.

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Ur way of teaching is sooo clear..👍

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[@rounakbaheti7091]

Hi sir, I have completed sfm once before, but could not pass in the subject.
Can I do these videos for conceptual clarity for the whole subject and practice questions from question bank I have, will it be sufficient?

[@vikramraghuwanshi9455]

Apne h bhthiacche tarike se samjhaya hai conceprs ofa bonds .

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thank you so much sir for making me understand this concept so easily inspite of the fact that I don’t have a BBA background .You made it so easy and precise. Regards!

[@laraibkhan7570]

Can you tell me which book he's referring to??

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what amount should an investor be willing to pay for a $1000 , 5year US government bond which pays $50 interest semi annually and is sold to yield 8%? will u please solve it

[@awantikabhattarai4214]

Very helpful thankyou sir!

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Explained very well... really 👍

[@Talhakhan-fk7bo]

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[@shreyakamat787]

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Sir make a video on credit default swaps valuation

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Knowledgeable content 😇

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what is difference between face value and issue price??

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I salute sir thanks so much

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Clearly explain

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[@rajattiksali426]

Which has higher bid ask spread callable bond or non callable bond

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Sir will u plz explain International Bond Market

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Thanks

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great

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Nice sir

[@manojg560]

Kya bond valuation chapter new syllabus or old syllabus ka same hai kya kuch add less hai?

[@NikhilJobanputra]

Mostly similar except a few differences

[@manojg560]

Thnx sir.

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Tq sir

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[@NikhilJobanputra]

Thank you! 😃

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20:16 deep discount bond

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[@NikhilJobanputra]

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Zabrdust Sir👍

[@NikhilJobanputra]

Thanks for liking

[@shashankjaiswal3260]

Sir.. issue price or face value both are same??????

[@NikhilJobanputra]

No Dear,
They are different. Watch the video for clarification.

[@aqibjaveed130]

Great sir love from Pakistan

[@pavithraramakrishnan7528]

Sir this vedio is available in english?

[@NikhilJobanputra]

Hi Pavithra,
I am sorry the English version of this video is available only on purchase.

[@naturaldisney5732]

How to calculate Present Value factor at the rate of 10%?

[@naturaldisney5732]

Kindly guide me

[@rohitjambhale7227]

is it applicable for cma final

[@NikhilJobanputra]

Definitely yes but not for SFM Paper in Group 3. Bond Valuation is part of Business Valuation Paper in Group 4

[@ADWAY13]

Your videos are too good....concepts get crystal clear 🙏

[@trochetiaboutic5278]

english please Sir, thank you

[@NikhilJobanputra]

Thanks for the request. The English Version of this video will be uploaded tonight.

[@NikhilJobanputra]

ua-cam.com/video/A5Ac1VUvcx0/v-deo.html

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When Hindi comes thinks become 70% easyy

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Thank you sir

[@mkashif4006]

thank you sir