A firm has issued bonds with a remaining maturity of 1 year, face value of $100 and an annual coupon rate of 5% (there is only one coupon payment left, to be paid one year from now). You observe that the price of the bonds is $94. What is the yield on the bonds today? Suppose that investors expect a 4% return on other bonds with similar maturity and risk and forecast that if the bond defaults, bond holders will get paid 70% of the coupon payments and principal value they are owed (i.e., a 70% recovery rate). What is the expected cash flow of the bonds at time 1? What is the probability of default implied by current bond prices?
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:
A firm has issued bonds with a remaining maturity of 1 year, face value of $100 and an annual coupon rate of 5% (there is only one coupon payment left, to be paid one year from now). You observe that the price of the bonds is $94.
- What is the yield on the bonds today?
Suppose that investors expect a 4% return on other bonds with similar maturity and risk and
- What is the expected cash flow of the bonds at time 1?
What is the probability of default implied by current
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