Bond Valuation & Relationships (Continuation)
📌 The relationship between market interest rate and bond price is inverse/negative, as the market rate acts as the discount factor; higher discount factor leads to lower present value.
💵 If a bond's coupon rate is higher than the market interest rate, the bond sells at a premium (market price > par value).
📉 Interest rate risk depends on two factors: coupon size (smaller coupons mean higher risk) and maturity (longer-term bonds are riskier regarding price fluctuation).

Yield to Maturity (YTM) Calculation & Guidance
🎯 YTM is the rate of return earned if the bond is held until maturity, equating the present value of future cash flows (coupons + face value) to the market price.
💡 If a bond sells at a discount (Price < 1000), the starting estimate for YTM should be higher than the coupon rate.
💡 If a bond sells at a premium (Price > 1000), the starting estimate for YTM should be lower than the coupon rate.

Debt vs. Equity Characteristics
✅ Bond coupon payments (interest) are tax-deductible for the firm, reducing taxable income.
⚖️ Bondholders have no voting rights and are creditors with a legal claim against firm assets in default, unlike equity holders (residual claimants).
🛡️ Perpetual bonds (like those with no principal repayment) can help firms benefit from tax deductibility while potentially avoiding bankruptcy risk related to principal repayment default.

Bond Indenture Features
📝 The Bond Indenture is a detailed contract between the issuer (company) and bondholders, usually monitored by a trustee (often a bank) to protect investor interests.
💰 The Trustee must ensure indenture terms are obeyed, manage the sinking fund for loan retirement, and represent bondholders in default.
💳 Bonds are typically issued with a Face Value of 1000, which is also the principal value repaid at maturity.

Bond Types and Security
🔄 Bonds can be Registered (company maintains a record of owners, coupon paid directly) or Bearer (whoever holds the physical bond claims the coupon, no formal record kept by the company).
🛡️ Debt securities are classified based on security: Collateral (backed by stocks/bonds) or Mortgage (secured by real property like land/buildings).
🚫 Debentures are unsecured bonds where no specific pledge or property backs the debt, making them riskier for investors unless the issuer is highly creditworthy.

Seniority, Repayment, and Call Provisions
🔝 Seniority dictates the preference in payment order upon default: Senior bonds are paid before Junior (Subordinated) bonds.
🛑 Bondholders (debt) always have preference over equity holders; equity is always subordinated to any form of bond or loan.
⏱️ Early repayment is managed via a Sinking Fund, maintained by the trustee, or through a Balloon Payment at maturity.

Protective Covenants
🛡️ Protective Covenants safeguard bondholder interests and come in two forms: Negative and Positive.
❌ Negative Covenants *limit* company actions, such as restricting dividend distribution (e.g., capping dividends at 1% of earnings) or barring mergers or issuing additional long-term debt.
✅ Positive Covenants *require* specific actions, such as maintaining a specified minimum working capital level or furnishing audited financial statements periodically to the lender.

Bond Ratings
📉 Bond Ratings assess the creditworthiness of the issuer, focusing only on the probability of default (interest/principal repayment), not interest rate risk volatility.
⭐ In Pakistan, PACRA (Pakistan Credit Rating Agency) assigns ratings: Long-term AAA signifies the lowest expectation of credit risk (highest quality).
⚠️ Ratings below BBB (e.g., BB, B, CCC) indicate speculative bonds, meaning a significant or high probability of credit risk/default exists.

Key Points & Insights
➡️ Understand the inverse relationship between market interest rates and bond prices to gauge immediate market impact on existing holdings.
➡️ Use the coupon rate vs. market rate comparison as a quick initial guide to determine if a bond is trading at a premium or discount.
➡️ Remember that debt interest payments are tax-deductible, offering a key financial advantage to the issuing firm over paying dividends to equity holders.
➡️ Scrutinize Negative Covenants in the indenture, especially restrictions on mergers and additional long-term debt, as these directly impact future risk exposure.

📸 Video summarized with SummaryTube.com on Jan 17, 2026, 12:29 UTC