Bond

Johan Kurniawan / 141521435

Natya Nindyagitaya / 1415
Bond Introduction

Shares give ownership but bond dont but more like debenture
Shares dont give a interest but in the way of profit or loss in the
increase or decrease of the price share
But bond commonly give fixed interest which called coupon
Definiton of Bond

Bond can be define as long-term debt that will be repayable at

maturity with fixed interest if any.
Long-term debt is bond while short-term debt is called bill
Bond have maturity date
Interest from bond is fixed if any and already settled
Known also as fixed income securities
Bond Code

The bond give code to differentiate with other bond

Example that used in Surabaya Stock Exchange in 2000s

A A A A B B B C C D E F G
Explenation :
AAAA : Abbreviation of the company who release bond
BBB : Code for bond name that issue
CC : Interest rate (if own several interest rate) and other option
D : Type of bonds
E : Type of interest rate
FG : Code from scriptless
Serial Bond and Term Bond

Bond can be serial bond, term bond or even combination

Serial bonds means that the maturity date is in sequence
Term bond means that the maturity is in the same time
Type of Bonds

Looks from the issuer of the bond there are several type of bond
which are:
Government bond
Municipal bond
Corporate bond
Government Bond and Municipal Bond

Government need a boost in financial by issuing bond

In Indonesia can be referred as SUN ( Surat Utang Negara )
Government bond assumes a lot safer compare to the corporate
bond
Municipal bond is issued by local government with the same
motive as central government
Corporate bond

This bond is issue by private company that have maturity date

with or without coupon that already settle in bond contract
Corporate bond is protect with bond indenture
Bond Value

There are three bond values:

Maturity Value (Represent face/par value)
The promised value will be paid at the time the bond matures
Market Value
The selling value that listed in capital market at certain moment
Intrinsic Value
Intrinsic Value

Estimation the true value of the bond

Cant specifically calculated but can be estimate
Intrinsic value can be determine by :
1 2
= + ++ +
(1+)1 (1+)2 (1+) (1+)
Information :
NO = intrinsic value
i = discount rate
Kt = coupon from t=1 until t=n
NJTn = Value bond in maturity date
Intrinsic Value

For constant coupon rate (K1=K2==Kn=K)

= +
1 + (1 + )
=1
Information :
NO = intrinsic value
i = discount rate
Kt = coupon from t=1 until t=n
NJTn = Value bond in maturity date
Intrinsic Value

Bond can be coupon bond and pure-discount bond

Coupon bond is bond that pay coupon
Coupon is interest that pay by bond in certain period, usually every half-year or
yearly
Pure-discount bond is bond that dont pay coupon, so bond is sale in discount
Intrinsic value in Pure-discount bond calculated by :

=
(1 + )
Information :
NO = intrinsic value
i = discount rate
Kt = coupon from t=1 until t=n
NJTn = Value bond in maturity date
Liquidity

Also called marketability from the bond

It shown how fast investor can sell their bond without sacrifice
their bond prices
One of the parameter for calculate the liquidity of the bond is
known as bid-ask spread
Difference between highest demand price that investor willing to
sell and the lowest dealer willing to buy
Bond Proceed

Current Yield
Measured by the value of the coupon per year divided by the
current bond market value
Yield To Maturity
Yield To Call
Yield To Maturity

The rate of return of bonds purchased at current market prices and kept
to maturity
YTM can be found by :
1 2
= + ++ +
(1+)1 (1+)2 (1+) (1+)
Information :
YTM = yield to maturity
NO = current market price from bond
Kt = coupon from t=1 until t=n
NJTn = Value bond in maturity date
Yield To Call

Return from bonds from now until the date the bond is withdrawn
YTC similar to YTM with difference in time
Call Provision

The bond issuer would prefer to have the option of paying the
bonds at par value before the due date
For issues is advantage but for the investor is disadvantage
Yield Spread

The difference between the yield to maturity that is promised and

the yield to maturity of a default free bond that has the same
value of coupon and maturity time
Default Premium
Risk Premium
Expected YTM (Y) can be measure by :
+ Y = Promise YTM
= Y = Excpected YTM
1 Pd = Probability bond will fail
= The value of the unpaid bond
relative to the current market price
Bond Risk

Risk from bond is possibility that bond will not paid (default)
Bond rating can be use as proxy from bond risk
Bond rating is character symbol that issued by bond rating agency
to show the bond risk
In Indonesia there are several bond rating agency, example :
Moodys Investor Service Inc. PT ICRA Indonesia
Standard & Poors (S&P) PT Fitch Ratings Indonesia
Fitch Rating PT Pemeringkat Efek Indonesia
Bond Rating
 Bond Valuation Theorem

This theorem will elaborate the relation between bond prices

reflect the changes in interest rate, maturity and coupon.
Time to Discount Rate
maturity
10% 12% 14% 16% 18%
Coupon Rate 14%

15 1.304.243,18 1.136.217,29 1.000.000,00 888.490,88 796.336,90

14 1.294.667,50 1.132.563,36 1.000.000,00 890.649,42 799.677,54
13 1.284.134,25 1.128.470,97 1.000.000,00 893.153,32 803.619,50
12 1.272.547,67 1.123.887,48 1.000.000,00 896.057,86 808.271,01
11 1.259.802,44 1.118.753,98 1.000.000,00 899.427,11 813.759,79
10 1.245.782,68 1.113.004,46 1.000.000,00 903.335,45 820.236,55
1st : Bond Prices move against Market Yield

The interest rate relationship with the bond price with fixed
coupons is opposite
The increasing interest rates, the decreasing bond prices