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
R eceipt of bids and bid opening We discussed how to prepare the bids and to publish them in the earlier sub section. Now let us see how to receive and open bids. To receiv

Clearing and Settlement The Treasury Bills are available in physical form if an investor desires so. The market is mostly dominated by institutional players who have a facility

A division of Saron plc is considering introducing a new product.  The product is the result of work undertaken by the division's research and development department - the expendit

A firm's operating and financing decisions   Risk also results from decisions made within the company.  This risk is usually divided into two classes:  - Business risk is th

Basics of Convertible Bonds The provision of conversion in a corporate bond entitles the bondholder the right to convert the bond into a predetermined number of shares of commo

Question 1 (a) These are merely the differences of the two prices. Consequently the mark to market losses are given by { Q 1 - Q 0 ,Q 2 - Q 0 ,Q 3 - Q 0

Leveraged Buyouts (LBOs) A leveraged buyout is a financing technique where debt is used to purchase the stock of a corporation and it frequently involves taking a public compan


You've just won a huge $100 million lottery.  You've decided to invest your winnings in the following way:  $30 million in real estate,  $30 million in  corporate bonds and $40 mil

operating cycle of a vegetable growing business