Debt
7-1
,Learning Outcomes
At the end of this session you should be able to:
▪ Understand bond terminology
▪ Value bonds
▪ Calculate yield to maturity, current yield and rates of return
▪ Understand the concept of interest rate risk and calculate the
duration of a bond
▪ Understand the concept of default risk and explain the different
credit ratings
▪ Be aware of the variety of bonds that are available
7-2
,Bond Terminology
▪ Bond – A security that obligates the issuer to make
specified payments to the bondholder
▪ Coupons – The regular interest payments made to
the bondholder ( in £s)
▪ Maturity – The length of time (or quoted as a Maturity
date) over which payments will be made (in Years)
▪ Face Value (or Par Value) – The principal payment at
the maturity of the bond (in £s)
▪ Coupon Rate – The annual coupon payments as a
percentage of the face value (a %)
7-3
, Example - Bond
❑Suppose a company issues a bond with a 5-yr maturity,
a face value of £100 and a coupon rate of 9.5%
▪ Annual coupon = 0.095 x £100 = £9.5
▪ So the company would make 5 annual payments of £9.5
(per bond)
▪ At maturity the company would also payout the face value of
the bond i.e. £100
Time 0 1 2 3 4 5
CF per bond £9.5 £9.5 £9.5 £9.5 9.5+100
=£109.5
7-4
7-1
,Learning Outcomes
At the end of this session you should be able to:
▪ Understand bond terminology
▪ Value bonds
▪ Calculate yield to maturity, current yield and rates of return
▪ Understand the concept of interest rate risk and calculate the
duration of a bond
▪ Understand the concept of default risk and explain the different
credit ratings
▪ Be aware of the variety of bonds that are available
7-2
,Bond Terminology
▪ Bond – A security that obligates the issuer to make
specified payments to the bondholder
▪ Coupons – The regular interest payments made to
the bondholder ( in £s)
▪ Maturity – The length of time (or quoted as a Maturity
date) over which payments will be made (in Years)
▪ Face Value (or Par Value) – The principal payment at
the maturity of the bond (in £s)
▪ Coupon Rate – The annual coupon payments as a
percentage of the face value (a %)
7-3
, Example - Bond
❑Suppose a company issues a bond with a 5-yr maturity,
a face value of £100 and a coupon rate of 9.5%
▪ Annual coupon = 0.095 x £100 = £9.5
▪ So the company would make 5 annual payments of £9.5
(per bond)
▪ At maturity the company would also payout the face value of
the bond i.e. £100
Time 0 1 2 3 4 5
CF per bond £9.5 £9.5 £9.5 £9.5 9.5+100
=£109.5
7-4
