What is Default Risk?Both corporate and governments issue bonds for the investors, but there is a clear difference between them. Government bonds are free from the chances of default. That is, it is believed that government bonds will never fail to pay the interest rates and the principal as and when required.On the other hand, corporate bonds are not free from the chances of default as the investment made by the corporate are more risky assets. Corporate bonds therefore have the chances of a default if they go bankrupt or face other issues.The risk of corporate bonds going bankrupt and ... Read More

It's known to us that redeemable shares can be bought back by the issuing company on a later date but irredeemable shares cannot be bought back by the issuer before the date of maturity. However, for internal operation and regulatory reasons, shares need to be valued. There are many methods to calculate the value of a share. Let's check some of them.There are three classical valuation approaches to find the value of shares −Income ApproachMarket ApproachCost ApproachIncome ApproachThe discounted cash flow method is an appropriate and suitable method to determine the value of a non-redeemable share. The two inputs required ... Read More

Companies may generally offer two types of shares − ordinary shares and preference shares. Preference shares have preference over ordinary shares in terms of payment of dividends and returning the capital in case the company wounds up. The capital offered by preference shares is known as share capital. Preference shares are a favorite of long-term investors.Note − The two types of shares have some common features but in general, their differences are more than the similarities.Types of Preference SharesPreference Shares can be grouped into three different categories −Redeemable and Irredeemable Preference SharesCumulative and Non-Cumulative Preference SharesParticipative and Non-Participative Preference SharesRedeemable ... Read More

Unlike most other bonds, pure discount bonds do not carry an explicit interest rate. Instead, they offer a lump sum depending on the current face value of the bond on a future date. The difference between the purchase value and face value gives the YTM or return to the investor in such bonds.Pure discount bonds have −Purchase value − The present price of the bond.Maturity value − That is equal to a face value in the future.Maturity period − The time taken for maturity.Discount bonds have a lower price than the par value or a bond that is being traded ... Read More

The duration of a bond is its weighted average of times of cash flow. The calculation of duration provides importance to cash flows and their timing. The weight is calculated for the present value of cash flow to the bond value.Therefore, three types of calculations are involved in computing the duration of a bond −Calculating PV for each cash flow.Divide each cash flow by the aggregate of all cash flows for getting weights.Multiply years by each cash flow and summate for the duration.Note − Two bonds with equal face value but different coupon rates and cash flow patterns will have different ... Read More

Yield to MaturityA bond's yield to maturity is the bond's overall rate of return, considering both incomes from interests and any capital loss or gain. YTM is the internal rate of return of the bond. It is assumed in the case of YTM that an investor will buy the bond and hold it until it gains maturity value, and all interests and coupon payments have been made in a pre-assigned manner.Approximated YTMThe YTM considered above gives an approximate value. To get the real YTM, investors should use the trial and error process to find the best match of price with ... Read More

A bond is a long-term debt instrument, such as security usually redeemable after a certain period of maturity. The bond is issued by a party, such as the government to raise money. All bonds are not the same in nature. Some bonds may not be redeemable all the time and could be redeemed after maturity as well.Bonds issued by the government are free from risk and the government will always pay the interest which is low in terms of public and private bonds. Public bonds are also quite dependable but they are not free from default. Private-sector bonds offer the ... Read More

Credit rating is a process to measure the default risk of bonds. There are credit rating agencies in every country that do this. The idea is to keep investors in safe water when it comes to investing. Credit rating agencies follow various methods to measure the ratings, including imminent market prices fallout and the malfunction in the interest rate of bonds, etc.What is a Credit Rating?Credit ratings are an analysis of the risks associated with a financial entity, such as bonds and shares. A rating is assigned to an entity by renowned credit rating agencies after a thorough check of ... Read More

A business may need to know the value of its assets in certain conditions, such as when the business is sold or the assets are replaced. In such circumstances, liquidation and going concern value helps to determine the value of the business. There are differences between liquidation and going concern values.Liquidation ValueAs the name suggests liquidation value shows the value of its assets being sold and liquidity obtained from them. Liquidation value is considered after the termination of the business usually when it is sold.Generally, intangible assets are not calculated while calculating the liquidation value as the prices of intangibles ... Read More

The volatility of a bond price arises from the fluctuation of the interest rates. The volatility of a bond is given by duration and its yield to maturity (YTM). The formula for volatility is given below$$ Volatility = \frac{Duration}{1 + YTM}$$Price VolatilityPrice volatility is represented by percentage bond price change divided by changes in interest rate which is given by $\frac{(𝜕𝑃⁄𝑃)}{𝜕𝑦}$, where is the period required for yield.The degree of volatility is given by the absolute value of $\frac{(𝜕𝑃⁄𝑃)}{𝜕𝑦}$. So, a bond with $\frac{(𝜕𝑃⁄𝑃)}{𝜕𝑦}= −200$ is more volatile than one that had a $\frac{(𝜕𝑃⁄𝑃)}{𝜕𝑦}$ value of 100. The sign of ... Read More