A bond a has a par value of P100, a coupon rate of 10.75% and matures in 5 years. If interest is paid annually and the required rate of return is 10%, what is the bond's value by general constant rate formula?
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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:
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- Suppose the real risk-free rate of interest is 2%. Inflation is expected to be 2% for 2 years and then 3% thereafter. The maturity risk premium is 0.2% (t). where t is the number of years until maturity. The default risk premium is 2%. The liquidity premium is 1%. What is the nominal interest rate on a 4 year bond? 9.1% 7.8% 7.1%A bond quotes a rate of return of 5% and will pay $1,000 in one year with a probability of 42% and $0 with a probability of 58%. part A)What is the time premium? part B)What is the default premium?Consider a bond paying a coupon rate of 10% per year semi-annually when the market interest rate is only 4% per half-year. The bond has three years until maturity. This initial payment is $1000. A: What is find the bond’s price today and 6 months time after the next coupon is paid? B: What is the total rate of return on the bond?
- Consider a coupon bond with an 8% annual coupon rate, a 10% interest rate, and a$1000 face value. The bond will mature in 4 years. What is the duration of this bond? Duration isdefined as a weighted average of the maturities of the cash payments. Suppose the weightassigned to the maturity of 1 year is W. Show your work A: Duration=2.28 and W=7.77%B: Duration=3.56 and W=20.5%C. Duration=3.56 and W=23.1%D. Duration=3.56 and W=7.77%The real risk-free rate of interest, r*, is 4 percent, and it is expected to remain constant over time. Inflation is expected to be 2 percent per year for the next three years, after which time inflation is expected to remain at a constant rate of 5 percent per year. The maturity risk premium is equal to 0.1(t - 1)%, where t = the bond’s maturity. What is the yield on a 10-year Treasury bond?Assume the real risk-free rate of interest is 2%, inflation will be 3% for the next 2 years then inflation will be 4% thereafter, the maturity risk premium is 0.1%(t-1), the default risk premium is 2% and the liquidity premium is 1%. What is the yield on a 5-year bond?
- Suppose you can observe that 1-year bond interest rate is 4%, 2-year bond interest rate is 8%, and 3-year bond interest rate is 10% at time t. It is also known that the term premium on a 2-year bond is 1% and the term premium on a 3-year bond is 1.5%. a) What are the market's expected 1-year bond interest rates for the next two years from time t? b) How to interpret those expected short-term interest rates? (what would be the "possible" economic meanings in the expected short- term interest rates?) Discuss as least two "candidates" to explain them.Example: Suppose that a bond has a face value of P100,000and its maturity date is 10 years from now. The coupon rate is5% payable semi-annually. Find the fair price of this bond, assuming that the annual market rate is 4%. Given: Coupon rate r= 5%, payable semi - annually Face Value = 100,000 Time to maturity = 10 years Number of periods = 2(10) = 20 Market rate = 4% The bondholder receives 20 payments of P2,500 each, and P100,000 at t = 10. Present Value of 100,000: F P =- 100000 = 67,556.42 1+ 0.0410 Present Value of 20 payments of Php2500 each: Convert 4% to equivalent semi-annual rate: 1+ jm 0.04 1= (1+=)" -1 - (1+ ) - 1 - 1 = m 2 | = 0.0404Example: Suppose that a bond has a face value of P100,000and its maturity date is 10 years from now. The coupon rate is5% payable semi-annually. Find the fair price of this bond, assuming that the annual market rate is 4%. Given: Coupon rate r= 5%, payable semi - annually Face Value = 100.000 Time to maturity = 10 years Number of periods = 2|10) = 20 Market rate = 4% The bondholder receives 20 payments of P2,500 each, and P100,000 at t- 10. Present Value of 100,000: F 100000 = 67,556.42 1+ jm -1+0.0410 Present Value of 20 payments of Php2500 each: Convert 4% to equivalent semi-annual rate: 1 = (1+)"-1= (1+) - I = 0.0404 Direction: Answer the following just like the given example above. 1. Suppose that a bond has a face value of P220, 000 and its maturity date is 6 years from now. The coupon rate is 5% payable semi-annually. Find the fair price of this bond, assuming that the annual market rate is 8%. 2. Suppose that a bond has a face value of P50, 000 and its maturity date is 5 years…
- Try it: Duration 1. Consider a bond that has a coupon rate of 5 percent, five years remaining to maturity, and is priced to yield 4%. Assume semi-annual interest. a. What is the effective duration for this bond? b. What is the approximate change in price if the yield increases from 4% to 5%?Suppose that you buy a two-year 8% bond at its face value. a. What will be your total nominal return over the two years if inflation is 3% in the first year and 5% in the second? b. What will be your total real return?Consider a bond that has a face value of $1,000. The bond has a maturity of 25 years and pays coupons of 5.5% per annum. If the bond's required rate of return is 8.0% per annum nominal, and coupons are received semi-annually, what is the current market price of the bond?