3. What is Bond?
A bond is a long-term debt instrument by a
corporation or government.
Bonds are used by companies,
municipalities, states and sovereign
governments to raise money and finance for
variety of projects and activities.
4. Different types of Bonds:
Perpetual Bond
Coupon Bond
Zero-coupon Bond
Semiannual Coupon Bond
5. Perpetual Bond:
A perpetual bond is a bond that never matures. It
has an infinite time.
Formula:
V=I/Kd
Here, I= Coupon rate
Kd= Discount rate/ Rate of return.
6. Coupon Bond:
A non-zero coupon-paying bond is a coupon paying
bond with a finite time.
Formula:
V=I(PVIFAKd,n)+MV(PVIFKd,n)
Here, I= Coupon bond
kd= Discount rate/ rate of return
MV= Maturity Valuation
n= Time
7. Zero-Coupon Bond:
A zero-coupon bond is a bond that pays no interest
but sells at a deep discount from its face value.
It provides compensation to investors in the form of
price appreciation.
Formula:
V=MV(PVIFKd,n)
Here, kd= Discount rate/ rate of return
MV= Maturity Valuation
n= Time
8. Semiannual Coupon Bond:
A non zero-coupon bond adjusted for semi-annual
compounding.
Adjustments needed:
1)Divide Kd by 2
2)Multiply n by 2
3)Divide I by 2
Formula:
V=I/2(PVIFAKd/2,n2)+MV(PVIFKd/2,n2)