Notes On Bonds Valuation And Bond Rates

1. To begin, assume that it is now January 1, 1993, and that each bond in Table 1 matures on December 31 of the year listed. Further, assumes that each bond has $1,000 par value, each had a 30-year maturity when it was issued, and the bonds currently have a 10 percent required nominal rate or return.

Bonds are a debt investment, meaning the purchaser of the bond is loaning money to the company or government for a set period. They have a fixed interest rate, meaning the investor knows how much interest will be earned on the loan since the rate will not change.

1(a) Regular Treasury bonds are purchased at face value in the beginning or an adjusted price prior maturity. And in every period, normally annul or semiannual, investor will receive a coupon as an interest and at the maturity a principal plus coupon.

The yield to maturity on a 15-year bond is a true estimate of the cost of 30-year bond

3. Which of the following statements about the yield-to-maturity is true? a) Discounting all cash flows of a bond with the bond’s yield-to-maturity only gives us the correct price if we have a flat term structure of interest rates. b) The yield-to-maturity is upwards sloping. c) The yield-to-maturity is always a spot rate. d) Several of the above statements are true. e) None of the above statements are true. E is correct. The yield-to-maturity, y is the constant hypothetical interest rate that solves P = 1 FV c 1− + T y (1 + y) (1 + y)T

At what price will the bonds issue? (Do not round PV factors. Round your answer to the nearest dollar amount. Omit the "$" sign in your

Assuming the market interest rate on the issue date is 6%, the bonds will issue at $537,194.

D* = 3.59/1.053 = 3.41 years Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.

b. Generate a graph or table showing how the bond’s present value changes for semi-annually compounded interest rates between 1% and 15%.

2. The discount rate for this bond would be 0.70%. I started with an appropriate discount rate to derive my bond purchase price, since I would not purchase a bond without finding out ahead of time what a good price should be.

Through this method, we obtained theoretical yields of the 4.25% coupon bond and 10.625% coupon bond to be 2.899% and 2.639% respectively. The corresponding theoretical prices of the bonds are $108.27 for the 4.25% coupon bond and $149.31 for the 10.625% coupon bond (see Table 1 above).

Bond Discount represents an additional cost of borrowing and should be recorded as bond interest expense over the life of the bond. To follow the matching principle, bond discount is allocated to expense in each period in which the bonds are outstanding. This is referred to as amortizing the discount. Amortization of the discount increases the amount of interest expense reported each period. As the discount is amortized, its balance will decline and as a consequence, the carrying value of the bonds will increase, until at maturity the carrying value of the bonds equals their face amount. The journal entries are as follow:

Coupon bond is one that is below its nominal value. 99.05 It is less than 100 percent of the cash value of the price, which will be traded. Above the face value of the bond premium bond. 101,15 more than 100 percent of the cash value of your price quote. Market interest rates rise above the coupon rate of the bond discount bond when the bond is. Market interest rates, the bond 's coupon rate is below the bonds when the bond underwriters.

3. A european corporation has issued bonds with a par value of Sfr 1,000 and an annual coupon of 5 percent. The last coupon on these bonds was paid four months ago, and their current clean price is 90 percent.