Consider a bond selling at par of $1,000 with a coupon rate of 5% semi-annual coupon payment, and 10 years to maturity. (a) What is the price of this bond if the required yield is 15%? (b) What is the price of this bond if the required yield increases from 15% to 16%, and by what percentage did the price of this bond change? (c) What is the price of this bond if the required yield is 5%? (d) What is the price of this bond if the required yield increases from 5% to 6%, and by what percentage did the price of this bond change? (e) From your answers of parts (b) & (d), what can you say about the relative price volatility of a bond in a high-interest-rate environment compared to a low-interest-rate environment?
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:
Consider a bond selling at par of $1,000 with a coupon rate of 5% semi-annual
coupon payment, and 10 years to maturity.
(a) What is the price of this bond if the required yield is 15%?
(b) What is the price of this bond if the required yield increases from 15% to 16%,
and by what percentage did the price of this bond change?
(c) What is the price of this bond if the required yield is 5%?
(d) What is the price of this bond if the required yield increases from 5% to 6%, and
by what percentage did the price of this bond change?
(e) From your answers of parts (b) & (d), what can you say about the relative price
volatility of a bond in a high-interest-rate environment compared to a
low-interest-rate environment?
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