Bond Analysis & Valuation
Nguyen Anh Vu
ANALYSIS OF FIXED INCOME
INVESTMENTS
BY. NGUYỄN ANH VŨ
FACULTY OF SECURITIES MARKET
Nguyễn Anh Vũ
MAIN ISSUES ABOUT BOND
 Concepts
 Characters of bond
 Bond Classification
 Features of debt securities
 Some special types of bond
Nguyễn Anh Vũ
Faculty of Securities Market - Banking University
By.
CONTENTS
o MAIN ISSUES OF DEBT SECUTIES
o BOND MARKET
o RISK ASSOCIATED WITH INVESTING
IN BONDS
o YIELD MEASURES
o BOND VALUATION
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CONCEPTS
Bonds are securities that establish a creditor
relationship between the purchaser (creditor)
and the issuer (debtor). The issuer receives a
certain amount of money in return for the
bond, and is obligated to repay the principal
at the end of the lifetime of the bond
(maturity). Typically, bonds also require
coupon or interest payments. Since all these
payments are determined as part of the
contracts, bonds are also called fixed income
securities.
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Bond Analysis & Valuation
Characters of bond
 Corporate Bond Vs
 Common shares Vs
 Preferred stocks Vs
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Types by issuing entities
 Corporate Bond
 Government & Agency Bond
 Government Underwritten Bonds
 Mortgage Backed Securities – MBS
Nguyễn Anh Vũ
Faculty of Securities Market - Banking University
By. Nguyen Anh Vu
Bond Classification
 Types by issuing entities
 Types by payment scheme
 Types by markets
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US – GOVERNMENT BOND
 Treasury Bills. T-bills have maturities of up to
12 months. They are zero coupon bonds, so the
only cash flow is the face value received at
maturity.
 Treasury Notes. Notes have maturities
between one year and ten years. They are
straight bonds and pay coupons twice per year,
with the principal paid in full at maturity.
 Treasury Bonds. T-Bonds may be issued with
any maturity, but usually have maturities of ten
years or more. They are straight bonds and pay
coupons twice per year, with the principal paid
in full at maturity.
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Bond Analysis & Valuation
Government & Agency Bond Issues
Viet Nam Case
o Types of bond issued :
 Treasury Bills
 Treasury Bonds
 Bond for projects under central
management
 Investment Bonds
 Foreign Currency Bonds
 Local Government Bonds
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Types by repayment scheme
 Coupon Bond :
A Bond in which the issuers pay a stated coupon at
periodic intervals ( annual or semi-annual or
quarter) prior to maturity and pay the principal
equal to par value at the maturity.
 Zero-Coupon Bond:
Bond that are not contracted to make periodic
coupon payment are called zero – coupon bond.
The holder of a zero – coupon bond realizes interest
by buying the bond substaintially below its par
value ( buying bond at a discount) and being
received the par value repayment at the maturity.
The interest is the different between the par value
and the price paid for the bond)
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Faculty of Securities Market - Banking University
By. Nguyen Anh Vu
CORPORATE BOND
 Mortgage Bonds. These bonds are secured by
real property such as real estate or buildings. In
the event of default, the property can be sold
and the bondholders repaid.
 Debentures. These are the normal types of
bonds. It is unsecured debt, backed only by the
name and goodwill of the corporation. In the
event of the liquidation of the corporation,
holders of debentures are repaid before
stockholders, but after holders of mortgage
bonds.
 Convertible Bonds. These are bonds that can
be exchanged for stock in the corporation.
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Types by markets
 The domestic bond market is where the issuers
domiciled in the country issue bond and subject
to the regulations of that country.
 The foreign bond market of a country is where
the issuers not domiciled in the country are
issued and traded. Foreign bond are regulated by
the government of the local market.
 Eurobonds : Bonds are underwritten by an
international syndicate, at issuance they are
offered simultaneously to investors in a number
of countries, they are issued outside the
jurisdiction of any single country. ICMA(
International Capital Markets Association) is the
regulator.
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Bond Analysis & Valuation By. Nguyen Anh Vu

Features of debt securities

 Issuers
 Currency denomination
 Par value ( Face Value)
 Coupon Rate
 Repayment scheme
 Maturity
 Identification code (ISIN)
 Additional features:
 Call provisions
 Conversion Privilege
 Put provision (Puttable Bond)

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MẪU TRÁI PHIẾU

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Bond Analysis & Valuation By. Nguyen Anh Vu

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Trái phiếu có lãi suất thả nổi

Some special types of bond ( Floating Rate Bond )
 Trái phiếu chuyển đổi ( Convertible Bond )  Floating – rate bond ( variable-rate bond), have
coupon payment that reset periodically according to
A convertible bond is an issue that grants some reference rate
the bondholder the right to convert the  The coupon formula on certain determination
bond for a specificied number of shares of dates when the coupon rate is reset.
common stock.  Coupon rate = Reference rate + quoted
margin
Mệnh giá TP
- Reference rate: SIBOR,LIBOR…
( Par Value of Bond )
- Quoted margin is the additional amount that the
Tỷ lệ chuyển đổi = issuers agree to pay above the reference rate
( Conversion Ratio ) Giá chuyển đổi - Reset period
( Conversion Price of Equity )  EX : Coupon rate = 6 – month LIBOR + 100 Basic
points
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Bond Analysis & Valuation
Trái phiếu có thể thu hồi
Callable Bond
 The bond with the added feature ( call
provisions ) that permit the issuers call
( buy back ) an issue from the bond
holder prior to the stated maturity date.
 The price which the issuers must pay to
retire the issue is referred to as call
price or redemption price.
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Organization of
Fixed Income
Market
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Faculty of Securities Market - Banking University
By. Nguyen Anh Vu
BOND MARKET
 Bond Primary Market (See Primary Market
Chapter)
 Bond Secondary Market : After being issued on
primary market, bonds are continuously traded
on the secondary market.
 Price of debt instruments are normally quoted as
percentage with 100% equal to par value.
 Resale value of a bond depend on:
Relative change in market interest rate
Change in credit rating of a bond
Demand and supply for the bond
The strength or weakness of bond’s currency
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Conditions for listing corporate
bonds on HOSE
 The shareholding company, limited liability company
or State owned enterprise must, at the time of
registration for listing, have a minimum amount of
paid-up charter capital of eighty (80) billion
Vietnamese dong calculated at the value recorded in
the accounting books;
 Business operations in the two consecutive years
immediately preceding the year of registration for
listing must have been profitable, there must not be
debts which have been overdue for more than one
year, and all financial obligations to the State must
have been discharged;
 Having at least 50 bondholders in any one issue
tranche;
 There is a valid application file for registration of
listing bonds as required by article 10.3 of this
Decree.
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Bond Analysis & Valuation By. Nguyen Anh Vu

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CURRENT LISTING SCALE AT HOSE

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Bond Analysis & Valuation
CURRENT MARKET SCALE AT HASTC
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Rủi ro tín dụng ( Credit Risk )
 Default Risk:  Default Risk:
Default risk is defined as the risk that
the issuer will fail to satisfy the terms of
the obligation with respect to timely
payment of interest and principal.
Studies have examined the probability of
issuers defaulting. The percentage of a
population of a population of bond that is
expected to defaut is call the default
rate.
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Faculty of Securities Market - Banking University
By. Nguyen Anh Vu
Risks Associated With Investing in Bond
 Credit Risk
 Interest Rate Risk
 Reinvestment Risk
 Liquidity Risk
 Inflation Risk
 Exchange Rate or Currency Risk
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Rủi ro tín dụng ( Credit Risk )
If a default occurs, this does not mean the
investor loses the entire amount invested.
An investor can expect to recover a certain
percentage of the investment.
One tool investor use to gauge the default
risk of an issue is the credit rating assigned
to issues by Rating Agencies. ( Moody’s,
Standard & Poor’s, Fitch Rating)
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Bond Analysis & Valuation By. Nguyen Anh Vu

BOND RATING

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Rủi ro tín dụng ( Credit Risk )

 Down grade Risk
An unanticipated downgrading of an
issue or issuer increase credit spread
and results in a decline in the price of
the issue or issuer’s bond.
The popular tool used by investors to
gauge the prospects of an issue being
downgraded or upgraded is rating
transition matrix.

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Bond Analysis & Valuation
Interest Rate Risk
o The price of bond fluctuates with market
interest rates. This risk is referred to as
interest rate risk and is the major risk faced
by investors in the bond market.
o Price of a bond changes in the opposite
direction to the change in interest rate or
yield. So,
 If interest rates increases -> price of bond
decreases
 If interest rates decreases -> price of bond
increases
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Inflation Risk
 Inflation risk or purchasing power risk
arises from the decline in the value of
the securities’s cash flow due to
inflation.
 Fisher equation :
Real Return = Nominal Return -
Inflation rate.
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Faculty of Securities Market - Banking University
By. Nguyen Anh Vu
Re – Investment Risk
 Reinvestment risk is the risk that the
proceeds receive from the payment of
interest or principal ( scheduled payments,
called proceeds, principal prepayment) That
are available for reinvestment must be
reinvested at a lower interest rate that the
securities that generated the proceeds ( in a
lower interest rate environment)
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Liquidity Risk
Liquidity risk is the risk that the investor will
have to sell a bond below its indicated value,
where the indication is revealed by a recent
transaction. The primary measure of liquidity
is the size of the spread between the bid price
and the ask price. The wider the bid – ask
spread, the greater the liquidity
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Bond Analysis & Valuation
SOURCE OF RETURN
 Coupon Interest Payments
 Capital gain or loss
 Reinvestment Income
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Case
 FACE VALUE : 100.000 USD
 COUPON RATE : 10%
 ISSUED DATE : 09/05/2006
 MATURITY DATE : 09/05/2016
 TERM : 10 YEARS
 FREQUENCY : ANNUAL
 PRICE :110.000 USD
 Prevailing Rate : 9%
Should we buy this bond
Nguyễn Anh Vũ
Faculty of Securities Market - Banking University
By. Nguyen Anh Vu
Traditional yield measure
 Coupon Rate – Norminal Yields
 Current Yield
 Yield to maturity – YTM
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Coupon Rate
 The coupon rate, also called the
nominal rate, is the interest rate that
the issuer agrees to pay each years. The
annual amount of the interest payment
made to bondholders during the term of
the bond is called the coupon.
 Coupon= Coupon rate×Par value
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Bond Analysis & Valuation By. Nguyen Anh Vu

Lợi suất hiện hành ( Current Yield )
 Current Yield relates the annual coupon
interest to bond’s market price. The
drawback of the current yield is that it
considers only the coupon interest and no
other source for an investor’s return.
 The formula :
Coupon Rate × Par Value
Current Yield =
Market Price
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Lợi suất đến hạn – Yield to maturity
 YTM is the measure of annual average rate
of return from settlement date to maturity.
 The yield to maturity is the interest rate
that will make the present value of bond’s
cashflow equal to its market price.
 This is a simply a special case of an
internal rate of return (IRR) calculation
where the cash flows are those
received if the bond is held to the
maturity date.
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YTM equation YTM Estimated formula

F  P
P
C

C
 .... 
C

F C 
1
(1  YTM ) (1  YTM ) 2
(1  YTM ) (1  YTM ) n
n
YTM  n
F  P
Vôùi : 2
 C : Annual Coupon Interest Trong ñoù:
 P : Market Price P : Market Price
 YTM : Yield to maturiry n : Term
 F : Bond par value F : Par value
 n : Term C : Annual Coupon Interest

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Bond Analysis & Valuation By. Nguyen Anh Vu

Relationship between bond yields BOND VALUATION

for premium bonds:
Coupon rate > current yield > YTM  Discount Bond Valuation
for discount bonds:  Coupon Bond Valuation
Coupon rate < current yield < YTM  Convertible Bond Valuation
for par value bonds:
Coupon rate = current yield = YTM

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BOND VALUATION Valuing a Zero- Coupon Bond ( Discount Bond)

 The fundamental principle of finance is that the

true or correct price of an asset equals the present
value of an cash flows that the owner of the assets F
expects to receive during its life. P
 The step of a financial asset valuation: (1  y ) n
 Step 1: Estimate the expected cashflow

 Step 2: Determine the appropriate interest rate

or interest rates that should be used to discount
cashflow.
 Step 3: Calculate the present value of the
expected cash flows found in step 1 using the
interest rate determined in step 2.
Example :
20 years Discount Bond. Maturity value 1.000 USD.
Annual discount rate 8%. Calculate the price of bond
should be.

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Bond Analysis & Valuation By. Nguyen Anh Vu

Định giá trái phiếu Coupon  Annual Coupon Bond

C C C F
P0  1
 2
 ....  n
 1  (1  y)  n 
(1  y ) (1  y ) (1  y ) (1  y ) n P  C n
  F (1  y)
 y 
C: Annual Coupon Payment
Po : Intrinsic value of bond What is the present value of a 10 – years bond with the
y: Discount rare – required return of investor annual coupon rate of 12% that pay semi - annually.
( YTM ) Par value 1.000.000 VND and the market interest rate
F : Par value at 10%.
n : total number of period ( years)

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Semi – annual Coupon Bond

C 1 (1 y / 2)2n   2n

P    F (1 y / 2)
2 y/2 

What is the present value of a 10 – years bond with the

annual coupon rate of 12% that pay annually. Par value
1.000.000 VND and the market interest rate at 10%.

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Bond Analysis & Valuation By. Nguyen Anh Vu

Valuing a Bond between Coupon

Payment Valuing Convertible Bond
 Accrued Interest
Conversion Value : The value of the
 Full Price (Dirty Price) convertible bond if converted into
 Clean Price common stock at the stock’s current
market price.
Example :
Straight Bond Value : The estimated price
A 5 – years T-Notes with the annual coupon
rate of 8.1% that pay annually. Par value
a convertible security would sell for on
1.000.000 VND and the market interest rate at the open market if it lacked
8%. The issued date 8/8/2002. The projected convertibility.
settlement date 5/13/2005. Calculate the Convertible Bond Value = ?
price of this bond.

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Ñôn vò : nghìn VNÑ

 Example : Convertible Bond Issued SSI Conversion Ratio Common stock Conversion Value
Par Value : 100.000 VND. Market Price
Convert date : 1/30/2010. 10 60.000 600.000
Conversion Price: 10.000 VNÑ. 10 56.000 560.000
Interest Rate : 1.15%/thaùng
Market Price : 56.000 VND 10 40.000 400.000

 Conversion Ratio = 100.000/10.000 = 10 10 20.000 200.000

 Conversion Value :
10 10.000 100.000 = F
56.000 x 10 = 560.000VNÑ
10 8.000 80.000

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