The Valuation of Bonds and Bond Options

Question: Discuss about The Valuation of Bonds and Bond Options? Answer: Introduction The assignment has main objective of emphasizing on the valuation of the assets share and bond. The valuation is important as it provides the investors to know about their return from investment and it also provides them information to make decision on which instrument they must go on for a certain instant of investing the money. Valuation methods of shares and bonds are depicted here which are necessary to compare among them as there are plenty of shares and bonds are present in the market. Share valuation There are many methods available for valuing a share in the market which provides important information to select scripts in the market. Intrinsic value method is one which derives the value of one share by dividing net assets with total shares which provides the asset valuation per share of a company. Asset backed method is applicable for the business where huge fixed assets are associated with (Cumming Hou, 2012). The money available for every share by selling assets of the company after repaying the loan from the assets are the desired value of share in this method. Net asset method is applied when a takeover is occurred which target the realizable price of the assets of the company per share. However, the potential of income is not considered here whereas the method is suitable for valuing the intangible assets. Dividend yield method is another way to value the share which provides the yield of the share for an investor who wants to invest for a long term. The value per share be comes the percentage ratio of expected rate of return to normal rate which provides the high yield for the long term investors. Another popular method is book value method, where every share is measured in terms of total retained earnings in the balance sheet. The method is applicable for the companies which are associated with low yield but more retention ratio strategy accompanied by management (Bessler, Drobetz Seim, 2012). Bond valuation There are two methods of valuation in this case present value and yield checking method. Present value method is a traditional method that depicts the premium on the investment in present term what the instrument will provide in future considering a certain amount of interest rate as the discount rate which might be attainable for the investment sum in the market in normal (Barone Cuoco, 2013). In this valuation method, the present value is measured and the investment is compared with it for getting the desired return from the investment in present notation. If the net present value becomes positive, then the proposal of the investment is acceptable else not. The method has many complications in its method as it ignores many important factors such as risk associated with the investment and uncertainties in economy. The interest rate risk is not assessed too in this method (Dao Hoang, 2012). Yield checking method is also applicable as it provides important direction of the bond val uation in regards with current market price of the bond. The method is much flexible in determining the value of the bond where yield to maturity provides the total return from the investment. Conclusion It may be concluded that above assignment provides the information on various methods of valuation of bonds and shares which are really important in case of investors perception. The different methods are discussed with their different application in the market. Reference list Barone, E., Cuoco, D. (2013) The Valuation of Bonds and Bond Options: Some Empirical Tests.SSRN Journal. doi:10.2139/ssrn.512523 Bessler, W., Drobetz, W., Seim, M. (2012). Share repurchases of initial public offerings: motives, valuation effects, and the impact of market regulation.The European Journal Of Finance,20(3), 232-263. doi:10.1080/1351847x.2012.698991 Cumming, D., Hou, W. (2012). Valuation of restricted shares by conflicting shareholders in the Split Share Structure Reform.The European Journal Of Finance,20(7-9), 778-802. doi:10.1080/1351847x.2012.671782 Dao, B., Hoang, T.(2012) Callable Convertible Bond Valuation Framework and VIC Case.SSRN Journal. doi:10.2139/ssrn.2543085