Compute the price and the yield (IRR) of a BB 3-year bond with a face value of €1,000 that pays an annual coupon of 5%. The spot interest rates are OR1=3%, OR2=3.6%, OR3 =4.9%, OR4=5.3% and BB bonds pay a risk premium of 1,25% above AAA bonds. The bond's repayment is at par.

Compute the price and the yield (IRR) of a BB 3-year bond with a face value of €1,000 that pays an annual coupon of 5%. The spot interest rates are OR1=3%, OR2=3.6%, OR3 =4.9%, OR4=5.3% and BB bonds pay a risk premium of 1,25% above AAA bonds. The bond's repayment is at par.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 4MC

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Concept explainers

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:

Question

Compute the price and the yield (IRR) of a BB
3-year bond with a face value of €1,000 that
pays an annual coupon of 5%. The spot
interest rates are OR1=3%, OR2=3.6%, OR3
=4.9%, OR4=5.3% and BB bonds pay a risk
premium of 1,25% above AAA bonds. The
bond's repayment is at par.

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