Example of relationship between bond price and time, Financial Management

Illustration 

 

 

Discount bond (5 yr. bond with 10% coupon) (expected rate yield at 12%)

Premium bond (expected yield at 7.8%)

5

 92.6

109.0

4

 93.8

107.4

3

 95.1

105.8

2

 96.5

104.0

1

 98.2

102.0

0

100.0

100.0

Reasons for price changes of a bond:

  1. Change in the yield requirement of the issuer due to changes in the quality of credit of the issuer.

  2. Change in the price as the bond approaches maturity in case of premium or discount bond.

  3. Change in the price because of change in the yields of comparable bonds/securities.

While computing the bond pricing, the following assumptions are made:

  • Cash flows are known.

  • Coupon payment annually/semi-annually is made at exact period.

  • Required yield can be estimated.

  • One rate is used to discount all cash flows, i.e., with required yield rate.

The following cash factors are to be considered:

  • For callable bonds, cash flows cannot be certain. The investment decisions of the issuer depend on interest rate movements and other factors.

  • It is not possible to determine the appropriate yields and it need not be a single rate for all the future cash flows.

Posted Date: 9/10/2012 5:46:20 AM | Location : United States







Related Discussions:- Example of relationship between bond price and time, Assignment Help, Ask Question on Example of relationship between bond price and time, Get Answer, Expert's Help, Example of relationship between bond price and time Discussions

Write discussion on Example of relationship between bond price and time
Your posts are moderated
Related Questions
1.  Discuss the various techniques of cash management for an efficient working capital Management. 2.  Discuss the MM Hypothesis of Capital structure and its importance in corpo

How can funds be raised Funds are raised from financial markets. Financial markets is a general term used todenote markets where financial securities are teat. These markets in

Q. What do you signify by Cash? Cash :- For the motive of cash management the term cash not only includes cheques, bank drafts, coins, currency, notes, demand deposits with ban

Operating Budget It is a collection or set of formal financial documents that details expected expenses and revenues, as like all other expected operating and financial transac

What is Dividend Decision Determination of funds requirements and how much of itwould be generated from internal accruals and how much to be sourced from outsideis a crucial

Do you provide assignment help on the topic Use of Derivatives in Equity Portfolio Management?

Why do you think the host country tends to resist cross-border acquisitions, rather as compared to green field investments? Answer: The host country is inclined to view green f

formula and explanation for Gordon''s dividend capitalization method

Trial Balances: If the trial balance does not result in a "0", the various records will need to be reviewed to pinpoint the spot where the unbalance occurred and any necessary

Pension fund management Pension fund systems ought to be carefully designed and supervised to make sure that their purposes are met, the economic consequences are appropriate a