Bonds Valuation

Bonds Valuation

A.

Answer:

1.Par or Face Value

2.Coupon Rate

3.Maturity

4.Call Provision

5.Issue Date

6.Default Risk

7.Special Features

B.

Answer: Call provision in a contract of bond which provides the issuing corporation a right to buy back bonds under specific conditions before the maturity date (Tuckman, 2011).

Sinking fund provision in the contract of a bond which oblige the issuer to withdraw a part of bond issue every year (Tuckman, 2011).

A call is a privilege to the firm but not to the investor, particularly in that period where the interest rate is higher. Therefore the bonds with call provision are riskier than the ones without provisions.

Though sinking funds are structured to provide protection to the bondholders by guaranteeing that an issue can be withdrawing in an orderly manner. Sinking funds have lesser coupon rates as compared with those without sinking funds.

C.

Answer: The worth of any asset can only be determined by its PRESENT VALUE of its anticipated cash inflows (Brigham, 1998).

VALUE equals to PRESENT VALUE equals to

.

And this again depends on the interest rates that would prevail at that time. And it is very difficult to manage such changes that might take place at that time. For that adjustments would be made in the discount rates in order to satisfy the requirements (Brigham, 1998).

D.

Answer: Every bond has a particular pattern of cash flow containing a constant stream of interest payments including the return of face value at maturity.

The annual payment if the CF : PAYMENT equals toCoupon rate X Face valueequals to 10% X US Dollar1,000equals toUS Dollar100

The value of the bond for 10 Year at 10% annual coupon rate is given below:

0 1 2 3 9 10

100 100 100 100 100

90.91 1,000

82.64

--------- 38.55

385.54

1,000.00

In terms of equation this can be expressed as:

The Bond entails 10Year at 10% Annuity of US Dollar100 each year + a US Dollar1,000 payment which is lump sum at t equals to 10: (Tuckman, 2011).

PRESENT VALUE ANNUITY equals to US Dollar 614.46

PRESENT VALUE MATURITY VALUE equals to 385.54

VALUE OF BOND equals to US Dollar1,000.00

E. (1)

Answer: By using the calculator, just alter the figure of PAYMENT from US Dollar100 to US Dollar130, and then press the button of PRESENT VALUE to calculate the value of the bond: (Tuckman, 2011).

13% coupon bond's price is equals to US Dollar1,184.34.

In such a situation, as the coupon rate go beyond the bond's required ROR, rd, the bond's value then rises above face value, and is being sold at a premium.

E. (2)

Answer: In this situation in which the coupon rate (7%) is less than the bond's required rate of return (10%), the bond's price get below par. Just need to change PAYMENT to US Dollar70. It can then be seen that the 10- year value of bond decreased to US Dollar815.66. Hence the coupon rate is less than the required return, the bond's value falls below par, or would be sold at a discount. Further, the more the maturity, the greater the effect of price of any given rate of interests ...