Bonds Valuations

Question 1

Bond valuations by discounted cashflow approach

Answer 1

o This can be used for government or similar high quality bonds
o Valued using discounted cashflow approach at rates consistent with market sport
rate yield curve
o Market spot rates can be derived from yields available on zero coupon bonds or
from bond strips
o Other bonds such as corporate bonds cab be valued similarly but adjusting the yield
to allow for low security and marketability

Question 2

Valuing bonds with option features

Answer 2

o Many bonds have option features – callable and puttable bonds
o Callable bond : bond that the borrower can choose to repay at any time
o Puttable bond : bond where the investor can demand repayment at any time
o These should normally be priced for using option pricing techniques
o Puttable bond is more expensive than a normal bond without the option
o Callable bond is lower than the a normal bond without option