Summary: Bond Valuation and Interest Rates - Corporate Finance [EMNF2724]
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Course
EMNF2724 (EMNF2724)
Institution
University Of The Freestate (UFS)
Book
Corporate Finance
Notes of a second year student studying Bachelors of Accounting at the University of the Free State. With this notes that i have compiled, i was able to proudly say that i received a distinction in Financial Management by using this notes. If you are struggling with Financial Management use this no...
Summary: Ratio Analysis - Corporate Finance [EMNF2724]
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EMNF2724 (EMNF2724)
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Bond Valuation and Interest Rates Learning Unit 9
Coupon Rate
Par Value
𝟏𝟐% 𝑫𝒆𝒃𝒆𝒏𝒕𝒖𝒓𝒆𝒔 𝑤𝑖𝑡ℎ 𝑎 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑽𝒂𝒍𝒖𝒆 𝑜𝑓 𝑅100 𝑒𝑎𝑐ℎ.
PMT = Nominal value x Coupon Rate
Debt financing
Future Value of Debentures:
• Buy back from
public. 1. Nominal Value x Discounted %
→ Redeem Debentures @ a lower value.
Can you REMEMBER why → R100 @ a discount rate of 4% = R96.00
debt is better than equity? 2. Nominal Value x Premium %
1. Debt has a tax effect! → Redeem Debentures @ a higher value.
2. Debt has less risk – → R100 @ a premium rate of 4% = R104.00
contract that secures the
3. Redeem @ Nominal Value.
repayment of debt.
→ FV = NV.
• End of the term.
Maturity • Time remaining in the contract.
• N – in your calculation.
× Current rate of return on bonds.
× Market return for similar bonds.
× After TAX!!!!
Yield to maturity
× NOT THE COUPON RATE.
× WACC = Cost.
× Calculator = i.
Nominal Interest rate Real Interest Rate.
The stated interest rate. Takes inflation into account.
Bond Ratings
1. AAA (very high quality) → C (very risky) or D (default category).
2. BBB and higher = Investment-grade bonds due to an acceptable level of risk.
3. BB and lower = Speculative-grade bonds that have a higher level of default.
o Example: Junk Bonds.
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