Question

i. Outline some of the distinctive features of bond markets, including the range of issuers and their motivations. ii. Explain the principal characteristics of typical bond instruments such as face value, maturity, coupon, and market price, in the context of a specific example (either a numerical example of your own construction, or from real-world financial data). iii. Explain and illustrate using a numerical example how we may price a bond with periodic fixed coupon payments as well as terminal principal payment over a fixed number of periods.

Answer 1

Bound is debt bearing financial instrument that pay a fixed rate of coupan over the period of at fixed interval. The market wide large amount of date to business and government 82 finance there working capital and venture. It is as large as a stock market but have little attention in the news. It is a stable source of corporate finance, liquidity and soomthing the durable consumption. It helps in determine interest rate in the economy and business mood over time which indicates the economic face like boom or bust. It provide government to raise fund and provide stimulus package in the economy. Government municipalities and corporate sector eligible to issue Bond.

Face value is the original or initial value of the bond while market value or market price will be depends upon number of factor. It is the value that is paid at the time of maturity also called par value.

Maturity is the period over which bonds coupon will be paid and at the time of maturity face value will be returned.

Coupon is the interest rate which is fixed at the time of issue of a bond period typically on a semi annual basis or annually calculated on the basis of face value.

Market price of a bond is the price at which which bond is traded in the market. It depends upon the demand and supply eye of the bond maybe higher or lower than face value. It depends upon investor perception about company performance. If market value is higher than face value it is issued at premium while if market value is lower than face value then it is issued at discount.

Suppose a bond issue by x limited company at face value of 1000 and pay annual counpan at 10% means coupon amount is 100. Mature in 2 years. So its over all yield called yield to maturity single rate at which future cash flow will be equal to present value of the bond.

pricing or valuation of a bond is changing over time due to change in the interest rate and market value of the bond which is inversely related.

Price of Bond depend upon the current interest rate. There is inverse relationship between interest rate and price of Bond. Bond price equals the present value of expected future cash flow at a unique interest rate called yield to maturity.