BOND & DEBENTURE VALUATION

BOND
A bond represents a contract under which a borrower promises to pay interest & principal on specific dates to the holders of the bond Issuers of bonds in INDIA 1. central government 2. state government 3. public sector undertakings 4. private sector companies 5. municipal bonds

DEBENTURES
Under Section 2(12) debenture includes debenture stock, bonds and other securities of the company whether constituting a charge on the assets of the company or not. Debentures are bonds issued in acknowledgement of any indebtedness. Generally, however, they are issued under the companys seal and contain a provision for the repayment of principal sum at the appointed date and the payment of interest at fixed rate. Debentures are usually secured upon the companys property or undertaking

Valuation of bond and debenture

Assumptions in valuation of bonds 1. The coupon interest rate is fixed for the term of bond 2. The coupon payments are made annually & the next coupon payment is receivable exactly a year from now 3. The bond will be redeemed @ par of maturity

CONVERTABLE BOND OR DEBENTURE

A Convertible Debenture is a debenture that can be changed into a specified number of equity shares at the option of the owner at future date.

FEATURES
CONVERSION RATIO -It is the no of shares that an investor can receive when he exchanges his convertible debenture. Conversion Ratio= Par value of Convertible Deb Conversion Price.

CONVERSION PRICE- It is the price paid for the ordinary share at the time of conversion

VALUATION OF COVERTABLE BOND OR DEBENTURES.

Conversion Value Conversion Value=Conversion Ratio x Sh price

Valuation of Non-Convertible Debentures It is also known as Straight Debenture. Value of NCD=Sum of the present value of future interest payments & principal redemption at the required rate of return.

EXAMPLE
MARKET PRICE OF COMPA = 65 EXERCISE PRICE = 50 THEORITCAL VALUE =(65-50)*1 =15 THUS IF U WANT TO OBATAIN ONE SHARE U CAN EITHER BUY ONE SHARE OF 65 OR BUY WARRANT AND EXERCISE THE OPTION BY PAYING 50 AND ACQUIRE SHARE THUS; SHARE PRICE = 65 =50 + 1 WARRANT 1 WARRANT = 65-50=15

CALLABLE BOND
Bonds that allow the issuer to alter the tenor of a bond, by redeeming it prior to the original maturity date, are called callable bonds. The call option provides the issuer the option to redeem a bond, if interest rates decline, and re-issue the bonds at a lower rate The investor, loses the opportunity to stay invested in a high coupon bond, when interest rates have dropped

VALUATION OF CALLABLE BONDS

Value of Callable Bond = Value of Straight Bond - Value of Call Feature in Bond