BOND & DEBENTURE VALUATION.pptx

7/28/2019 BOND & DEBENTURE VALUATION.pptx

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BOND & DEBENTURE VALUATION


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BOND

A bond represents a contract under which aborrower promises to pay interest & principal onspecific dates to the holders of the bond

Issuers of bonds in INDIA1. central government

2. state government

3. public sector undertakings4. private sector companies

5. municipal bonds


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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 inacknowledgement 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 paymentof interest at fixed rate. Debentures are usually

secured upon the companys property or

undertaking


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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


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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.


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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


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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 futureinterest payments & principal redemption at

the required rate of return.


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EXAMPLE

MARKET PRICE OF COMPA = 65

EXERCISE PRICE = 50

THEORITCAL VALUE =(65-50)*1 =15

THUS IF U WANT TO OBATAIN ONE SHARE U CANEITHER BUY ONE SHARE OF 65 OR BUY WARRANT ANDEXERCISE THE OPTION BY PAYING 50 AND ACQUIRESHARE

THUS; SHARE PRICE = 65 =50 + 1 WARRANT

1 WARRANT = 65-50=15


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CALLABLE BOND

Bonds that allow the issuer to alter the tenorof a bond, by redeeming it prior to the originalmaturity date, are called callable bonds.

The call option provides the issuer the optionto redeem a bond, if interest rates decline,and re-issue the bonds at a lower rate

The investor, loses the opportunity to stayinvested in a high coupon bond, when interestrates have dropped


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VALUATION OF CALLABLE BONDS

Value of Callable Bond = Value of Straight

Bond - Value of Call Feature in Bond

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BOND & DEBENTURE VALUATION.pptx