C/F/76. The new bond issue valuation

This paper is devoted to the analysis of the new bond issue. The borrower has a history in the bond markets so that the main approach employed is the comparable approach. It is shown that if risk profiles of the bonds do not differ substantially then pricing characteristics of the existing bonds can be used to evaluate the new issue. The author thoroughly describes all kinds of risk that can be encountered by the bondholder. Macroeconomic and market risks are found to be similar for the issues with identical properties. The main source of risk in this case is the increased gearing of the company which can influence the credit rating granted by the credit agencies. However, if the company has low gearing, as in the case analyzed in the paper, it can be appropriate to use yield to maturity of the existing bond to estimate the required yield for the new bond. This paper will be useful for those researchers who wish to familiarize themselves with bond risks and simple strategies to evaluate non-callable bonds.