preview

Corporate Finance Analyst Of The Investment Bank

Decent Essays
Open Document

Introduction:
The corporate finance analyst of the investment bank is required to compute the fair price of the bond and to estimate the number of bond issuing. The computation is based on the yield to maturity, which measures the return that an investor would expect to receive by holding a bond until maturity.

The Yield Curve, also known as term structure of interest rate, is a commonly used financial tool that tracks the relation between the yields and the time to maturity of a bond. Estimating the yield on a non-currently traded bond and identifying mispriced bonds are the purposes of using the yield curve.It could, furthermore, be used to forecast future performance of the yield on a bond. (Harris, 2014) The yield curve could be …show more content…

(Fig. 1)
Knowing that, the A - rated bond, which was required to issue for the purpose of raising five million dollars debt, had a coupon rate of 5.5%, a maturity of 15 years and one $1000 face value .

Results:
Considering the third - order polynomial method with using the OLS regression, gave the values of estimated parameters. (Table 1) Thus, the function of fitted yield curve, which estimated the relationship between the yields and the time to maturity, could be determined. ( Fig. 2) Given that the time to maturity of required issuing bond was 15 years, which could therefore gave the yield of 5.005% according to the fitted yield curve function. Consequently, this would give the bond price of $1051.748 and the number of bond that investment bank should issue to raise debt was 4754. For a more precise estimation, the sub data-set of the A - rated bonds that had the coupon rate ranging from 5% to 6% could be picked out and calculated with the same procedure applied as before. This would then gave the the yield to maturity of 4.957%, bond price of 1056.979 and the number of issuing bond of 4730. (Table 2)

Limitation:
The third order polynomial fitted yield curve approach gives the estimated relationship between yields and maturities, however, the fitted trend is not capable enough to explain the variation in bond yields perfectly. If the required issuing

Get Access
Related
Get Access