The value of any financial asset is the present ✓ value of the cash flows the asset is expected to produce. For a bond with fixed annual coupons, its value is equal to the present value of all itsannual interest payments and its maturity value as shown in the equation below:Bond's value = VB:Int.Int.(1+ra)² (1+ra)²N+·+...+Int.M+(1+ra)* (1+ra)Int.M(1+ra) (1+ra)N+We could use the valuation equation shown above to solve for a bond's value; however, it is more efficient to use a financial calculator. Simply enter N as years to maturity, I/YR as the going annualinterest rate, PMT as the annual coupon payment (calculated as the annual coupon interest rate times the face value of the bond), and FV as the stated maturity value. Once those inputs are enteredin your financial calculator, you can solve for PV, the value of the bond. Remember that the signs for PMT and FV should be the same, so PV will have an opposite sign. Typically, you would enter PMTand FV as positive numbers, so PV would be shown as a negative value. The negative sign means that you are purchasing the bond, so the purchase price of the bond is paid out of your funds (thusthe negative sign) and is received by the issuing firm (a positive flow to the firm).Note that we calculated the bond's value assuming coupon interest payments were paid annually; however, most bonds pay interest on a semiannual basis. Therefore, to calculate the value of asemiannual bond you must make the following changes: N should reflect the number of interest payment periods so multiply years to maturity times 2, I/YR should reflect the periodic going rate ofinterest so divide the going annual interest rate by 2, and PMT should reflect the periodic interest payment so divide the annual interest payment by 2.For fixed-rate bonds it's important to realize that the value of the bond has a(n) [inverse relationship to the level of interest rates. If interest rates rise, then the value of the bond falls ✓;however, if interest rates fall, then the value of the bond risesA discount bond is one that sells below its par value. This situation occurs whenever the going rate of interest is above thecoupon rate. Over time its value will increase approaching its maturity value at maturity. A premium bond is one that sells above its par value. This situation occurs whenever the going rateof interest is below the coupon rate. Over time its value will decrease approaching its maturity value at maturity. A par value bond is one that sells at par; the bond's coupon rate is equal to thegoing rate of interest. Normally, the coupon rate is set at the going market rate the day a bond is issued so it sells at par initially.Quantitative Problem: Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is8%, what is the value of the bond? Do not round intermediate calculations. Round your answer to the nearest cent.$Quantitative Problem: Potter Industries has a bond issue outstanding with a 6% coupon rate with semiannual payments of $30, and a 10-year maturity. The par value of the bond is $1,000. If thegoing annual interest rate is 8%, what is the value of the bond? Do not round intermediate calculations. Round your answer to the nearest cent.$

Price of bond is present value of coupon payment and plus present value of the face value of bond…

urity value prem Bond sells above its par value. This situation occur of interest is below the coupon rate. Over time its value will decrease approaching its maturity value at maturity. A par value bond is one that sells at par; the bond's coupon rate is equal to the going rate of interest. Normally, the coupon rate is set at the going market rate the day a bond is issued so it sells at par initially. increas Quantitative Problem: Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 8%, what is the value of the bond? Do not round intermediate calculations. Round your answer to the nearest cent. Quantitative Problem: Potter Industries has a bond issue outstanding with a 6% coupon rate with semiannual payments of $30, and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 8%, what is the value of the bond? Do not round intermediate calculations. Round your answer to the nearest cent.

urity value prem Bond sells above its par value. This situation occur of interest is below the coupon rate. Over time its value will decrease approaching its maturity value at maturity. A par value bond is one that sells at par; the bond's coupon rate is equal to the going rate of interest. Normally, the coupon rate is set at the going market rate the day a bond is issued so it sells at par initially. increas Quantitative Problem: Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 8%, what is the value of the bond? Do not round intermediate calculations. Round your answer to the nearest cent. Quantitative Problem: Potter Industries has a bond issue outstanding with a 6% coupon rate with semiannual payments of $30, and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 8%, what is the value of the bond? Do not round intermediate calculations. Round your answer to the nearest cent.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 3Q: The rate of return on a bond held to its maturity date is called the bonds yield to maturity. If...

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Suppose that y is the yield on a perpetual government bond that pays interest at the rate of $1 per annum. Assume that y is expressed with simply com- pounding, that interest is paid annually on the bond, and that y follows the process dy = a(y0 −y)dt + oydWt, where a, y0, and o are positive constants and dWt is a Wiener process. (a) What is the process followed by the bond price? (b) What is the expected instantaneous return (including interest and capital gains) to the holder of the bond?
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For the yield-to-maturity (YTM) to qual the actual compound return an investor realizes on an investment in a coupon bond, we must assume: O A. cash flows will be paid as promised. B. The bond will be held until maturity. C. cash flows will be reinvested at the YTM rate. D. All of the above.
In a bond portfolio, the following are the present values of all cash flows by annual period: Year PV Cash flows (millions) 1 14.3 2 13.2 3 15.3 4 10.5 5 18.4 What is the percentage contribution to duration of the year 3 cash flows? Enter answer in percents.
The required return of a risk-free asset can be approximated by The pure time value of money and anticipated inflation premium. а. The 20-year T-bond yield. Ob. The 90-day T-bill rate plus the risk premium. C. The 90-day T-bill rate plus anticipated inflation premium. d.
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A fixed rate bond with notional 1 pays annual coupons of c at times T1,T2,...,Tn whereTi+1 =Ti+1andnotional1attimeTn. a) Write down the bond price Bc^(FXD)(t) at time t ≤ T in terms of ZCBs.
еВook Problem Walk-Through Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065 and it sells for $1,200. a. What are the bond's nominal yield to maturity and its nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places. YTM: % YTC: % Would an investor be more likely to earn the YTM or the YTC? -Select- -Select- ent yield and to Table 7.1) Round your answer to two decimal places. b. Since the YTM is above the YTC, the bond is likely to be called. Since the YTC is above the YTM, the bond is likely to be called. Since the YTM is above the YTC, the bond is not likely to be called. Since the YTC is above the YTM, the bond is not likely to be called. Since the coupon rate on the bond has declined, the bond is not likely to be called. I. If the bond is called, the capital gains yield will remain the same but the current yield will be…
2. Bond valuation The proces value of the cash flows that the security will generate in the future s of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present There is a consistent and predictable relationship between a bond's coupon rate, its par value, a bondholder's required return, and the bond's resulting intrinsic value. value and its par value. These result from the relationship between a bond's coupon rate and a bondholder's required rate of return Trading at a discount, trading at a premium, and trading at par refer to particular relationships between a bond's intrinsic pay, and a bondholder's required return Remember, a bond's coupon rate partially determines the interest-based return that a bond reflects the return that a bondholder to receive from a given investment. The mathematics of bond valuation imply a predictable relationship between the bond's coupon rate, the bondholder's required return,…
The forward rate f(t1,12) of a bond, is the implicit interest rate in a future period between time t1 and t2. For example, assuming continuous time returns, if the discount rate from period 0 to t1 is: exp(-r t1), and from period 0 to 12 (greater than t1) is: exp(-r t2), then the forward rate f from t1 to t2 maintains the following no arbitrage relationship: exp(-r t1) exp(-f (t2-t1) exp(-r t2)). Suppose we observe the prices of a 14-year zero-coupon bond (with a face value of $93.31), where P(t1,t2) regans the price of the bond between t1 and 12, and a year 7-to-14 forward rate as follows:P(0.14) - $86.5496905000 and f(7,14) - 0.6074704253 %. Calculate the price of a 7-year zero-coupon, with face value $99.27: $82.9604 $96.0778 ✓(25 %) $96.2349 $82.1804
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