A coupon-paying corporate bond matures in 6 years. The bond pays a coupon of £4 at the end of each year, plus a £100 par payment at maturity. If investors require a rate of return of 5% for holding this bond, what is the price of the bond today?
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:
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A coupon-paying corporate bond matures in 6 years. The bond pays a coupon of £4 at the end of each year, plus a £100 par payment at maturity. If investors require a
rate of return of 5% for holding this bond, what is the price of the bond today? -
(e) Still considering the same bond as in part (d), suppose that, due to signals that the Bank of England will increase interest rates in the coming years, investors instead require a rate of return of 7% for holding this bond.
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i) What is the new price of the bond?
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ii) What channel of
monetary policy is in action here?
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