What is the current price of a 10% coupon bond (with standard semiannual payments) if the yield-to-maturity on the bond is 5% (APR with semiannual compounding), the bond matures two years from today, and the bond has a face value of $1,000? Describe two reasons the yield-to-maturity of the bond might increase. What will happen to the price of the bond when the YTM increases? For a given change in yield-to-maturity (e.g., 100 bps), will a short-term or long-term bond have a bigger percentage change in price? What is the relationship between coupon rates and yield-to-maturity for bonds selling at a premium? at a discount? at par value?
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:
Please provide clear calculations/explanations, as indicated, for each of the following questions:
- What is the current price of a 10% coupon bond (with standard semiannual payments) if the yield-to-maturity on the bond is 5% (APR with semiannual compounding), the bond matures two years from today, and the bond has a face value of $1,000?
- Describe two reasons the yield-to-maturity of the bond might increase. What will happen to the price of the bond when the YTM increases?
- For a given change in yield-to-maturity (e.g., 100 bps), will a short-term or long-term bond have a bigger percentage change in price?
- What is the relationship between coupon rates and yield-to-maturity for bonds selling
- at a premium?
- at a discount?
- at par value?
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