Introduction to Corporate Finance

4: Valuing Bonds

CONCEPT REVIEW QUESTIONS 4-3

9 What are the main types of issuers of bonds in Australia and New Zealand?

10 What is the difference between a pure discount bond and an ordinary bond that sells at a discount?

11 Explain who benefits from the option to convert a bond into shares of ordinary shares, and who

benefits from the option to call a bond.

4-4 BOND MArkeTS

In terms of the dollar volume of securities traded each day around the world, the bond market is much

larger than the stock market. Although some bonds are listed on stock exchanges, many international

bonds trade in an electronic over-the-counter (OTC) market. The OTC market is not a single physical

location where bonds are traded. It is a collection of dealers around the world who stand ready to buy

and sell bonds. Dealers communicate with one another and with investors via an electronic network.

Because trades are decentralised and negotiated privately, it is usually difficult to obtain accurate, up-

to-date price information on most bonds. Nevertheless, it is useful to see how bond prices are quoted in

different segments of the market.

4-4a BOND PrICe QUOTATIONS

Let us take an example of a corporate bond quoted in the national Australian press for 6 October 2012

for trading which occurred on 5 October 2012. The company was Heritage Bank, and the listing of its

retail bond on the Australian Securities Exchange (ASX) is shown in Table 4.2:

TABLe 4.2 RETAIL BOND ISSUE BY HERITAGE BANK, 6 OCTOBER 2012

Company

name and

ASX code

Bond detail Last

sale

Vol.

100s

Val.

’000s

Quotes buy/sell Cpn %

p.a.

Next cpn

date

Mat./

conv. date

Mat.

value

YTM

%

Heritage

Bank

HBSHA

10% 3 mth, 19 108.80 9 92.868 108.60/108.80 10.00q 17/11/12 27/10/14 100 6.3

Source: Australian Financial Review, 6–7 October 2012. Used with permission.

The leftmost column gives the ASX code for this bond issue, and the next column provides the name

of the issuer (Heritage Bank) and the nature of the bond: a 10% coupon bond maturing in 2019 and

paying interest every three months. (These bonds were issued in October 2009, so they had an original

maturity of 10 years. They were called ‘Heritage notes’.) The next column gives the price of the bond at

its last sale, as a percentage of the face value (108.80% of face value of $100 – the number listed under

the column ‘Mat. value’ – or $108.80). There were 900 bonds traded on this last sale (figure in column

‘Vol. 100s’), and the total value of the trade, after costs, was $92,868. The quoted spread between the

buying and selling price is 20 cents ($108.80–$108.60).

LO4.3