Question

1. Describe key features (par value, coupon interest rate, maturity, call provision, sinking fund, required rate, etc.) of a bond? 2. What are the key components of a basic bond valuation model? 3. Distinguish between various types of bond yield concepts: 1) Current yield & Capital gains yield 2) Yield to maturity 3) Yield to call.

Answer 1

Par value of a Bond - Par Value of a bod is just as the Face value of Bond means the value of bond with out any premium or discounts

Coupon interest rate :- Coupon Interest Rate is the rate at which interest is paid anually by the company to the bond holders

Maturity:- Maturity is the time period when then Repayment of the bond is made Such as bond issue for 5 years thet 5 is a maturity

Call provision:- A call provision is a type of clause in which a issuer of the bond has a right to call the option or make the repayment of bond or buyback before the maturity of the bond

Sinking fund::- A sinking fund is a fund which is set aside and this fund is use to make the repayment of the funds borrowed through bonds

Required rate :- It is a rate of return which is expected by the Bond holders This rate is used in doing discounting or identifying PV of bond

The Key components of a basic bond valuation model are interest rate or coupon rate , corporate tax rate , Redemable Value , Maturity Period , Face value or net proceeds .

Various types of bond yield concepts are :-

Current yield & Capital gains yield - current yield is the annual yeild means the gain through the interest received on bond and the capital yeild is the yield or profit earned through the price diffrences of the bond

Yield to Maturity :- It is little bit similiar to the IRR as yield to maturity is the rate of discount at which the sum of all cashinflow of futures is equal to the current selling price of the bond

Yield to call :- Yield to call is just a meausre of the bond in case if we hold the bond upto the time of call period.