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I am trying to value a illiquid corporate bond issued at a discount to face value by a privately held company in India. The corporate bond is a sinkable bond (amortizing principle) with coupon rate of more than twice the risk free rate of the country.

Questions:

  1. What all should be component of discount yield of the bond
  2. Once we have identified the components on the issuance date, how do we carry on the valuation as on different dates
  3. How do we identify the credit spread for the bond issued (since this is a privately held company in a sector where bonds with similar ratings are unavailable

  4. How can one justify such high coupon for the bond

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  1. The yield of the bond depends on the discount to par at which it was issued, its maturity date, coupon rate, payment frequency, and daycount conventions. Yield computations do not require you to know the risk-free rate.
  2. You can compute yield using the YIELD function in excel with the correct inputs.
  3. What kind of spread are you referring to, ZSpread? This would require you to shock the risk-free spot curve until you price the bond to its current market price.
  4. High coupons are justified by high credit risk of the issuer. A high coupon/yield generally means that the issuer has a high risk of default. Investors must be compensated for this risk with a higher return on their investment.

You can find more details on yield interpretation and computation and this pretty good guide: https://quantcoyote.com/2017/03/14/bond-yield-explained/

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