Bond Valuation

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In financing decision we learned that bonds are issued to raise cash. Governments and corporations borrow money by issuing bonds. The bond issuer pays the bond holder regular interest payments and repay the original amount at the expiry date of the bond. For example, a company issued a bond of $100 for 5 years which pays regular payments of 10% of the investment (10% of 100 = 10) to the person who purchased the bond. In this case, the company received cash of $100 and will have to pay $10 each year for five years to the bond holder and have to repay the investment of $100 at the end of 5 years.

Regular interest payments are called coupon. The original investment is called the principal or face value and the date of expiry is called maturity or the date of maturity.