Consider a 25-year coupon bond which has a face value of $500 and a 5% coupon rate. Its current price is $500. The interest on this bond is expected to go up from 5% to 10% next year. a) Calculate the current yield of this 25-year coupon bond. b) Using the coupon bond pricing formula, calculate the expected price at which this bond will be sold next year. c) Calculate the expected rate of return if you buy the bond today and sell it next year. d) Are you going to invest on this bond if your investment horizon is just one year? Explain why or why not.
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:
Consider a 25-year coupon bond which has a face value of $500 and a 5% coupon rate. Its current price is $500. The interest on this bond is expected to go up from 5% to 10% next year.
a) Calculate the current yield of this 25-year coupon bond.
b) Using the coupon
c) Calculate the expected
d) Are you going to invest on this bond if your investment horizon is just one year? Explain why or why not.
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