Bonds Valuation

The formula used for the valuation of bonds is shown below (if coupon payments are paid annually):

where	CP	=	Annual coupon payment
	i	=	Yield to maturity
	n	=	Number of payments (years)
	FV	=	Face value (par value)

If coupon payments are paid semi-annually then:

As for bonds that pay coupon payments quarterly, then just replace 2 in the formula above with 4.

The following table shows some of the yield of bonds with their expected value respectively (assuming coupon payments are paid semiannually):

Coupon Rate	Yield	Par Value	Bond Value
10%	8%	1000	1197.93
10%	10%	1000	1000.00
10%	12%	1000	849.54

So, the higher the yield for a bond, the lower is the present value of the bond.

Dividend Cover and Payout Ratio

The dividend cover ratio gives an idea to external parties about the results of operation of a company that might drop leaving the amount of dividends to be paid from the result of the year unchanged or reduced.

Dividend cover ratio that is more than 1.0 (> 1.0) indicates that the ordinary dividends should be paid our for the year.

However, dividend cover ratio that is less then 1.0 (< 1.0) shows that the company is not earning enough profits to pay out as dividends. Therefore, the company is using past retained earnings to fund the dividends payment. This may be a danger sign for potential investors.

The dividend cover ratio is just the opposite of the payout ratio.

Payout ratio that is more than 1.0 (> 1.0) implies that retained earnings are being used to payout as dividends.

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