Bond Valuation Case Study
How Is the value of any asset whose value Is based on expected future cash flows determined? D. How is the value off bond determined? What is the value off 10-year, $1,000 par value bond with a 10 percent annual coupon If Its required rate of return Is 10 percent? E. 1 What would be the value of the bond described in part d if, Just after it had been Issued, the expected inflation rate rose by 3 percentage points, causing Investors to require a 13 percent return? Would we now have a discount or a premium bond? E. 2 What would happen to the bonds’ value if Inflation fell, and rd declined to 7 percent?
Would we now have a premium or a discount bond? E.
3 What would happen to the value of the 10-year bond over time if the required rate of return remained at 13 percent, or if it remained at 7 percent? (Hint: with a financial calculator, enter MET, I/YR, IF, and N, and then change (override) n to see what happens to the UP as the bond approaches maturity. ) f. L What is the yield to maturity on a 10-year, 9 percent annual coupon, $1,000 par value bond that sells for $887. 00? That sells for $1,134. 20? What does the fact that a bond sells at a discount or at a premium tell you about the relationship between rd and the bond’s coupon rate?
T 2 want are ten total return, ten current Wylye, Ana ten capital galas Wylye Tort ten discount bond? (Assume the bond is held to maturity and the company does not default on the bond.
) g. How does the equation for valuing a bond change if semiannual payments are made? Find the value off 10-year, semiannual payment, 10 percent coupon bond if nominal rd = 13%. H. Write a general expression for the yield on any debt security (rd) and define these terms: real risk-free rate of interest (r*), inflation premium (P), default risk premium (DRP), liquidity premium (LIP), and maturity risk premium (MR.). I.
Define the nominal risk-free rate (ref).
What security can be used as an estimate of j. What is a bond spread and how is it related to the default risk premium? How are bond ratings related to default risk? What factors affect a company’s bond rating? K. What is interest rate (or price) risk? Which bond has more interest rate risk, an annual payment I-year bond or a 10-year bond? Why? L. At any given time, how would the yield curve facing an AAA-rated company compare with the yield curve for U.
S. Treasury securities? At any given time, how would the yield curve facing a db-rated company compare with the yield curve for U. S. Treasury securities?