A 10-year corporate bond yields 16.5%. The real risk-free rate is 2% which is projected to be constant indefinitely. The expected inflation for year 1 is 1%, for year 2 is 2%, and it will increase by 1% each year after. The default risk premium is twice the liquidity premium and they will remain the same regardless of the maturity year of the bond. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where t is the maturity of the bond.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
A 10-year corporate bond yields 16.5%. The real risk-free rate is 2% which is projected to be constant indefinitely. The expected inflation for year 1 is 1%, for year 2 is 2%, and it will increase by 1% each year after. The default risk premium is twice the liquidity premium and they will remain the same regardless of the maturity year of the bond. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where t is the maturity of the bond.
What is the difference between the yield or interest rate of a an 8-year Government issued bond and 8-year Corporate bond?
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