Bond and Trere Valuation

Bond and their valuation

What is bond?

Bond: A bond is a long term debt contract under which borrower agrees to make payments of interest and principles of specifics period, to the holder of the bond.

Types of bond-

The treasury bond/Government bond, corporate bond, Municipal bond and foreign bond.

Treasury bond: Treasury bond sometimes referred to as government bonds, are issued by the federal government. It is reasonable to assume that the federal government will make good on it is promised payments, so these bond have no default risk. However, Treasury bond prices decline when interest rates rises they are not free of all risks.

Corporate bond: The corporate bond market is where private firms obtain much of their long term debt capital. Maturities on corporate bonds generally range from 10 to 30 years and risky.

Municipal bond: This type of bond issued by the state and local government to finance long term investment, infrastructure costs, and capital improvements. It is have maturity up to 40 years and risky free.

Foreign bonds: The bond issued by foreign government or foreign corporation.

Key features of bond-

Par value: It is as face amount of bond.

Coupon payment: The specifics number of dollars of interest paid each period, generally each 6 months.

Coupon interest rate: The stated annual interest rate on the bond. It is usually fixed for the life of the bond.

Floating rate bond: A bond whose interest rate fluctuates with shifts in the general level of interest rates.

Zero coupon bond: A bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation.

Original issue discount bond: Any bond originally offered at a price below it is par value.

Maturity date: A specified date on which the par value of a bond must be repaid.

Original maturity: The number of years to maturity at the time a bond is issued.

Call provision: A provision in a bond contract...