Valuing Bonds

Dirk Schoenmaker and Willem Schramade
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Willem Schramade: Nyenrode Business University

Chapter 8 in Corporate Finance for Long-Term Value, 2023, pp 207-238 from Springer

Abstract: Abstract This chapter introduces the basic types of bonds and considers their valuation. Bonds are an important source of funding for corporations. And even government bonds are relevant to companies, since the yield on government bonds serves as the risk-free rate discussed in Chap. 4 . We explain the drivers of bond yields and the term structure of interest rates. Subsequently, we discuss the liquidity and credit risk of corporate bonds, including the role of ratings. Social and environmental factors are increasingly being integrated in the valuation of corporate bonds. Studying the company’s business model is important for sustainability integration in the credit risk analysis of bonds. This chapter shows how to include a company’s adaptability to sustainability transitions into the credit risk analysis. Companies that can better adapt their business model face a lower credit risk and hence a lower cost of debt. In addition, there is innovation in the form of sustainability-linked bonds, green bonds, and social bonds to cater for sustainable investment projects.

Keywords: Agency costs; Bid-ask spread; Bond; Bond ratings; Bond yields; CDS spread; Coupon; Corporate bonds; Covenant; Credit rating; Credit risk; Credit risk analysis; Default risk; Duration; ESG; ESG integration; Face value; Green bonds; Government bonds; High-yield bonds; Investment-grade bonds; Junk bonds; Liquidity; Liquidity risk; Maturity; Principal; Seniority; Social bonds; Sustainability-linked bonds; Term spread; Term structure of interest rates; Transitions; Yield; Yield spread; Yield to maturity (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/978-3-031-35009-2_8

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