CORPORATE FINANCE

Corporate Finance

Corporate Finance

Part I: Bond Valuation

Bond is a security issued in the series, in which the issuer concludes that it is indebted to the bondholder and is committed to pay him interest payments and principal amount. In contrast to shares, bonds do not give the holder any rights right of ownership, dividend or to participate in general meetings. Bonds represent property rights, divided into a number of equal units, which means that every bond holder have the same right. Bonds could be issued by various parties/bodies, including Government and Private Sector. Government issues Treasury and Municipal Bonds, while the Private Sector could issue Corporate Bonds.

The maturity of the Bond varies from Bonds to Bonds; maturity is the number of years in which the issuer undertakes to fulfill the obligations which it imposes on the bond. Maturity date means the date when the debt will cease to exist, because the issuer will redeem the bond.

Bonds can be divided into coupon and zero coupon bonds. Zero coupon bonds (zero coupon bonds) are usually issued at a discount, and at maturity full payment of nominal value is made. Coupon bonds (coupon bonds) are associated with the periodic coupon payment, the amount of which is usually dependent on the rating of the issuer. Interest on the bonds may be fixed or variable. Typically, the amount of coupon bonds with floating rate is presented in the form of a "base rate + x%", eg LIBOR + 0.5%. It is also possible that interest rates depend on inflation (Kevin, 2006).

The bonds can earn more if you use the fluctuations of prices, which tend to be big. Knowing which is based on the valuation of bonds, do not feel surprised if you want to sell them before the redemption, because it is unlikely that you can get for it if 100% of nominal.

The basic principle of bond states that coupon, or interest on bonds does not change during its life, and at the end of the savings period, investors receives the face value of bond. Speaking of Bonds, it is impossible to avoid the word profitability, which shows the change in value of the bond. Profitability is the rate of return, or more simply, a rate of percentage of profit that gives your bond at a specific time. When you buy a bond at a nominal price, the profitability is exactly as much as her interest, but when the price changes, the profitability decreases or increases to compensate for this change.

We have selected American Financial Group and American Express for the purpose of our analysis. We will consider the financials of the company to calculate their bond values and yields and will evaluate them.

The value represents the discounted stream of bond payments that it generates.

And for zero-coupon bond formula looks like this:



where:

PVB= Current Value of bonds

i - Interest rate per year bonds

FV - face value of bonds (face value)

YTM - interest income in the period ...