Two bonds, A and B, have the same credit rating, the same par value, and the same coupon rate. Bond A has 30 years to maturity and bond B has 5 years to maturity. Please demonstrate your understanding of interest rate risk by answering the following questions : Discuss which bond will trade at a higher price in the market. Discuss what happens to the market price of each bond if the interest rates in the economy go up. Which bond would have a higher percentage price change if interest rates go up?
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:
- Two bonds, A and B, have the same credit rating, the same par value, and the same coupon rate. Bond A has 30 years to maturity and bond B has 5 years to maturity. Please demonstrate your understanding of interest rate risk by answering the following questions :
- Discuss which bond will trade at a higher price in the market.
- Discuss what happens to the market price of each bond if the interest rates in the economy go up.
- Which bond would have a higher percentage price change if interest rates go up?
- Please substantiate your argument with numerical examples.
- As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy?
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