BOND VALUATION

BONDS vs. EQUITY

Bonds
Defined lifetime Maturity date Normally pays a known interest rate Negotiable

Equity
Shared ownership, assets and profits Variable dividend Normally voting right Negotiable

BOND ???
A BOND is an agreement in which an issuer is required to pay the investor the amount borrowed plus interest over a period of time. A bond is in effect an IOU which can be bought and sold.

REPO and REVERSE REPO

A REPURCHASE AGREEMENT (REPO) is an agreement for the sale of an instrument with the simultaneous agreement by the seller to repurchase the instrument at an agreed future date and agreed price. A REVERSE REPURCHASE AGREEMENT (REVERSE REPO) is an agreement for the purchase of an instrument with the simultaneous agreement by the seller to resell the instrument at an agreed price.

Bonds Are Risky???

Credit risk : is the risk that a counterparty will fail to honour its agreed obligations. Market risk: results as a change in the value of a bond caused by any movements in the level or volatility of the current market yields or cost of money. It also includes liquidity risk. Operational risk covers matters such as:
Settlement or Herstatt risk which arises from timing differences which may arise between receiving and delivering assets. Legal risk which is concerned with contract enforcement.

Strategic risk arises from the way in which

CREDI T RISK

YIELD CURVE
A yield curve displays graphically the relationship between interest rates at different maturities having the same credit risk. It is also called TERM STRUCTURE OF INTEREST RATE. Yield curve represents expectations about future interest rates.

Do visit
www.projectbaba.com