Introduction

Bond Valuation and Analysis in R

Clifford Ang

Senior Vice President, Compass Lexecon

About me

• Advise clients on valuation and other financial issues primarily related to litigation
• Author of Analyzing Financial Data and Implementing Financial Models Using R

Bonds

• Debt instrument
• Repay borrowed amount + interest
• Focus on fundamental concepts of bond valuation

Characteristics of a bond

• Issuer: the entity that borrows the money
  • Corporations
  • Governments
  • Municipalities
• Principal: the amount borrowed
  • Also called par value or face value
• Coupon rate: the amount of interest the issuer agrees to pay
  • Annually, semi-annually, or quarterly
  • Fixed or floating rate

Characteristics of a bond

• Maturity date: data when principal amount is returned to investor
  • Some bonds do not mature
• Embedded options
  • Could affect bond's cash flow profile, i.e., can change amount and timing of cash flow
    • Callable bond: issuer can buyback bond earlier than maturity at a pre-agreed price
  • More complex analysis is required

Bonds in this course

• Annual coupons
• Fixed rate
• Fixed maturity
• No embedded options

Price vs. value

• We will use "price" and "value" interchangeably, but there are distinctions:
  • Price: amount paid to acquire asset
  • Value: how much the asset is worth
• For actively traded assets, price may be considered the best estimate of value

Let's practice!

Bond Valuation and Analysis in R