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Bond is considering a debt
instrument that give the interest at periodic stream to investors and principle
amount going to repay on maturity date specified earlier. A legal contract
going to prepare between buyer and seller which contain all the legal requirements,
terms and conditions of bonds. Many factors included in the bonds like sinking
fund provision, put provision, call provision, maturity, coupon, coupon rate
and face value.
In the field of financial
instrument, bond pricing is empirical matter. In every issuance of bond, the
price of bond depends on coupon, principle or par value, yield to maturity and
periods to maturity. The main characteristics of the bond are: a bond with the
higher yield to maturity or market rates will be priced low, a bond with a
higher number of periods to maturity will be priced higher, a bond with higher
par value will be higher and bond with higher coupon rate will be higher.
Bonds that consider more valuable
that widely traded instead of that bonds that traded sparsely. Investor also
wary for purchasing that bond that face problem in selling and this element let
down the piece of bonds at the time of liquidation.
The issue price of bond is stele
with the market interest rate and that interest rate of the bond and they both
are going to pay at the same date. Following are the basic steps to determine
the price of the bonds: find out the interest amount that going to pay from
bonds. Determine the present value of the bond. Determine the present value of
the interest payment and then calculate the bond price.
The market value or selling price
of the bond is the present value of the cash in future that obtain from the
bonds. The payment of the face value of the bond and semiannual interest
payment at the date of maturity will be discounted with the interest rate of
market. The market interest rate going to change on hourly basis whereas the
bond interest rate never changes.
Bond are going to issue by
borrowers for long term investment and issuers are foreign entities,
municipalities, corporations and US treasury. The price of bond equals to
present value of the cash flow future expected. The interest rate is discounted
the cash flow of bond which is known as yield to maturity. It includes 3
methods: pricing coupon bond, adjusting the semiannual coupon and pricing zero
coupon bond.
Amortization bond with effective
rate of interest: the amounted bond premium must be amortized to interest
expense over the life of bond when the bod is going to sold at premium.
Effective interest rate method is considering must preferred method for
amortization the premium of bond. Under this method, the amount of interest
will be collaborating with the book value of bond in a given year. When the
book value going to decrease, the amount of interest also going to decrease.
Straight line amortization method
is helping in allocating the interest to a bond through its life equally. The
process of recording the interest expense until its maturity with associate the
bond equally.
Bonds are often used in
retirement for investment. But it considers that many people invest in bonds
for long term investment purpose. Bonds can buy a portfolio keeping it a float
in a stock market with their reliability and steady return. Coupon rate
determine by issuers use the prevailing market interest rate and bonds maturity
to measure the competitive interest rate and can be expressed as annual
percentage of the face value. Interest rate of bonds may be fixed or float.
After issuance of bond, it can be traded on secondary markets and with the increase
of interest rate, the bonds also going to rise.
The advantages of corporate bonds
are varied options for investors, select the preferred coupon structure like
zero or fixed rate, step coupon rate, floating coupon rates, better yield,
liquidity and certainty investment. The disadvantages of bonds are higher
credit risk, secondary market, and interest rate risk.
Reference of Memo about the bonds
accountingcoach.com. 2019. Amortizing Bond Premium
with the Effective Interest Rate Method.
https://www.accountingcoach.com/bonds-payable/explanation/8.
accountingtools.com.
2019. how to calculate the issue price of the bond. april 2.
https://www.accountingtools.com/articles/how-to-calculate-the-issue-price-of-a-bond.html.
corporatefinanceinstitute.com.
2019. What is Bond Pricing?
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/bond-pricing/.
Coryanne
Hicks, Staff Writer. 2018. The Ultimate Guide to Bonds. april 3.
https://money.usnews.com/investing/investing-101/articles/the-ultimate-guide-to-bonds.
GraduateTutor.com.
2018. An Introduction to Bonds, Bond Valuation & Bond Pricing.
http://www.graduatetutor.com/corporate-finance-tutoring/yields-bond-valuation-pricing/.
infoforinvestors.com.
2019. Corporate Bonds Pros And Cons. march 20.
https://infoforinvestors.com/academy/bonds/corporate-bonds-pros-cons/.
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