The bond pays interest semi-annually. The risk-free yield is 2.4%. Therefore, its currentcredit spread is 3% - 2.4% = 0.6%. Two years later its credit spread increases from 0.6% to 1% whilethe risk-free yield doesn’t change. Assuming the face value of the coupon bond and risk-free bond is100.a) What is the return of investing in this bond over the two year? b) If we define credit value as the difference between the prices of risk-free bond and defaultablebond, what is the current credit value of the bond, and what is it after two years?c) Decompose the return into two components attributable to moving to maturity and theincrease in the credit spread
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:
The bond pays interest semi-annually. The risk-free yield is 2.4%. Therefore, its current
credit spread is 3% - 2.4% = 0.6%. Two years later its credit spread increases from 0.6% to 1% while
the risk-free yield doesn’t change. Assuming the face value of the coupon bond and risk-free bond is
100.
a) What is the return of investing in this bond over the two year?
b) If we define credit value as the difference between the prices of risk-free bond and defaultable
bond, what is the current credit
c) Decompose the return into two components attributable to moving to maturity and the
increase in the credit spread
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