CIMA F3 Syllabus C. Financial risks - Market Value of Bonds - Notes ^{1 / 3}

Have a think (or even better) a look at when we calculated the cost of debt for Irredeemable debts (bonds)

You will see that we took the capital and interest and discounted it (at a guessed rate) then compared it to the MV of the bond..and so on

This is because you calculate the MV of a loan or a bond by taking its Capital and Interest and discounting it down by the cost of debt

Amount of interest payment
The market value of a traded bond will increase as the interest paid on the bond increases, since the reward offered for owning the bond becomes more attractive.
Frequency of interest payments
If interest payments are more frequent, say every six months rather than every year, then the present value of the interest payments increases and hence so does the market value.
Redemption value
If a higher value than par is offered on redemption, the reward offered for owning the bond increases and hence so does the market value.
Period to redemption
The market value of traded bonds is affected by the period to redemption, either because the capital payment becomes more distant in time or because the number of interest payments increases.
Cost of debt
The present value of future interest payments and the future redemption value are heavily influenced by the cost of debt, i.e. the rate of return required by bond investors.
This rate of return is influenced by the perceived risk of a company, for example as evidenced by its credit rating.
As the cost of debt increases, the market value of traded bonds decreases, and vice versa.
Convertibility  
If traded bonds are convertible into ordinary shares, the market price will be influenced by the likelihood of the future conversion and the expected conversion value, which is dependent on the current share price, the future share price growth rate and the conversion ratio.