Valuation of bonds and debentures in this PPT there's the discription about the bonds and debentures

1. YTM
Valuation of bond and Preference
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10. Bond Value can be calculated as below
• Present Value interest Factor of Annuity (PVIFA)- Manual calculation
• This can be calculated from normal calculator
• Value of Bond(Vd) = I x PVIFAr,n + RV x PVIFr,n
• I = Annual Interest
• M or RV= Redemption Value
• r = expected rate of return by the investors 15%
• n= maturity period of bond 5 years
• PVIFA15,5 = 3.353
• PVIF15,5 = 0.497
Year Amount
Present
Value
Factor @
15% Working/ Calculation
1 1 0.870 (1/1.15)= 0.87
2 1 0.756 (0.87/1.15)=0.756
3 1 0.658 (0.756/1.15)=0.658
4 1 0.572 (0.658/1.15)=0.572
5 1 0.497 (0.572/1.15)=0.497
PVIFA 3.353

11. Bond Value can be calculated as below
• Students should remember that redemption can happen at discount or at face value (.i.e at
Par) or at premium.
• Value of bond = 9 x 3.353 + 105 x0.497 = Rs. 82.36
• If the Market value of bond is less than or equal to 82.36 we should buy the bond , If
market value of the bond is more than 82.36 i.e. intrinsic value we should not buy the
bond
• Remark : IF Market Value is > Intrinsic Value = Do not Buy
• IF Market Value is < Intrinsic Value = Buy

12. Alternatively the Bond Value can be
calculated as below
• Value of Bond(Vd) = I1/(1+r)1+ I2/(1+r)2 + I3/(1+r)3 + I4/(1+r)4 + I5/(1+r)5+ RV/( 1+r)n
•
• Where I = Interest received on bond each year
• r = expected rate of return by the investors
• RV = redemption value of the bond at maturity
• n= maturity period of bond
• Interest on bond is always calculated on the face value
• Hence same question can be calculated bond value can be calculated
• Interest every year = ( 9/100)* (100)= Rs. 9 every year
• = 9/(1+.15)1 + 9/(1+.15)2 + 9/(1+.15)3+ 9/(1+.15)4 + 9/(1+.15)5 + 105/(1+.15)5
• = (9/1.15) + (9/1.323) + (9/1.521) + (9/1.750)+(9/2.013) + (105/2.013)
• = 7.826 + 6.805 +5.917+ 5.145+4.474+52.161 = 82.36
• If the Market value of bond is less than or equal to 82.36 we should buy the bond , If market
value of the bond is more than 82.36 i.e. intrinsic value we should not buy the bond
• Remark : IF Market Value is > Intrinsic Value = Do not Buy
• IF Market Value is < Intrinsic Value = Buy