summary and test bank chapter 5.6

Third
year
Financial Management
Summary & test bank(5&6)




( BIS ) Romario Khaled
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01149154059

, [FINANCIAL MANAGEMENT SUMMARY & TEST
Third year BANK(5&6)]

Chapter ( Five )
Chapter ( Five)
Bond valuation
* in general we have two kind of bond government bond & corporate bond

- A corporate bond : is a long-term debt instrument ‫ اداة‬indicating that a corporation
has borrowed a certain amount of money and promises to repay it in the future under
clearly defined terms. ‫بموجب شروط محددة بوضوح‬
- Most bonds are issued with maturities of 10 to 30 years and with a par value, principle
or face value ‫القٌمة االسمٌة اللً مطبوعه علً الورقة‬
- The coupon interest rate ‫ الفوايد المستحقة علي السند‬: is represents the percentage of the
bond’s par value that will be paid annually, typically in two equal semiannual payments,
as interest as (10 % annual interest rate par value )
- it may be paid annually , semi or quarterly .

- The bondholders, who are the lenders, are promised the semiannual interest payments
and, at maturity, repayment of the principal amount.
2. Valuation Fundamentals. ‫طرق التقيم‬
Modern theory of finance : valuation is the process that links risk and return to determine
the value of an assets .
Key Inputs
There are three key inputs to the valuation process:
(1) cash flows (returns),
(2) timing,
(3) a measure of risk, which determines the required return.
Types of bond
1 – perpetual bond ‫ملوش تارٌخ استحقاق محدد‬
2 – maturity bond ‫لٌه تارٌخ استحقاق محدد‬
1 – perpetual bond ‫ملوش تاريخ استحقاق محدد‬
-The main characteristic of perpetual bonds is that it has a fixed amount of interest
(return) and it has no maturity date.
- The cash flow of such type of bonds consists only of the periodical interest amounts
- the value of this type of bonds is equal to the present value of those expected cash .
B0 =
Ex 1 : Assume that there is a 10% coupon interest rate perpetual bond with a 1000 EGP par value
that pays interest annually (I= 1000 × 10% = 100 EGP),
find the value of bond under the following three assumptions of the
required rate of return


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, [FINANCIAL MANAGEMENT SUMMARY & TEST
Third year BANK(5&6)]

1) 8% 2) 10% 3) 12%
The bond "value under the assumptions:

1) The value of the bond assuming the required rate of return: 8 %
B0= (100/8%) = 1250 EGP
2) The value of the bond assuming the required rate of return: 10 %
B0= (100/10%) = 1000 EGP
3) The value of the bond assuming the required rate of return 12 %
Bo = (100/12%) = 833 EGP.
2 – maturity bond ‫ليه تاريخ استحقاق محدد‬
It has
- a fixed amount of interest (return) paid annually or semi-annually
- it has fixed maturity date (a specific maturity date).
In this case, the value of this bond can be calculated using the following equation:

B0 =

where
B0 = value of the bond at time zero
I = annual interest paid in dollars
n = number of years to maturity
M = par value in dollars
rd = required return on the bond
Ex 2 : Assume that there is a 10% coupon interest rate 5 year bond with a 1000 EGP par value that
pays interest annually (I= 1000 × 10% = 100 EGP),
find the value of bond under the following three assumptions of the
required rate of return
1) 8% 2) 10% 3) 12%

1)B0 =

= 1079.85 EGP

2)B0 =

= 1000 EGP

3)B0 =

= 927.9 EGP
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, [FINANCIAL MANAGEMENT SUMMARY & TEST
Third year BANK(5&6)]

- Another way to find the value of the bond using PVIF and PVIFA


as follows:

B0 =

PVIF =

OR
From tables
Ex 3 : Assume that there is a 10% coupon interest rate 5 year bond with a 1000 EGP par value that
pays interest annually (I= 1000 × 10% = 100 EGP),
find the value of bond under the following three assumptions of the
required rate of return
1) 8% 2) 10% 3) 12%

1 - B0 = 100 + 1000 = 1079. 87 EGP


2 - B0 = 100 + 1000 = 1000 EGP


3 - B0 = 100 + 1000 = 927.88 EGP

For semiannual :
1 - Interest rate (I) will divided by 2
2 – number of payment (n) multiplied by 2
3 – RRR or discount rate (rd) will divided by 2
Ex 4 : Assume that there is a 10% coupon interest rate 5 year bond with a 1000 EGP
par value that pays interest semi annually (I= 1000 × 10% = 100 EGP),
find the value of bond under the following three assumptions of the required rate of
return 10 %
Solution

I will be 5 % and interest will be 1000 * 5% = 50
n will be 10
RRR = 10 % / 2 = 5 %
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