Lackson PLC and Hardy Corp. both have 8 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Lackson PLC bond has 2 years to maturity, whereas the Hardy Corp. bond has 15 years to maturity. (i) If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (ii) If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of these bonds be then? (iii) What does this problem tell you about the interest rate risk of longer-term bonds
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:
Lackson PLC and Hardy Corp. both have 8 percent coupon bonds outstanding, with
semiannual interest payments, and both are priced at par value. The Lackson PLC bond
has 2 years to maturity, whereas the Hardy Corp. bond has 15 years to maturity.
(i) If interest rates suddenly rise by 2 percent, what is the percentage change in the price
of these bonds?
(ii) If interest rates were to suddenly fall by 2 percent instead, what would the percentage
change in the price of these bonds be then?
(iii) What does this problem tell you about the interest rate risk of longer-term bonds?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
