Determine the example of rate of return of a bond, Financial Management

Assignment Help:

Determine the example of Rate of return of a Bond

A bond is paying 10 % interest per annum and is going to mature in next two years At maturity it would pay its principal amount of 100$. If expected return on bonds today are (i) 7 %, (ii) 10 % and (iii) 15 %, what value would you pay for the bond today.

Solution

By using the above formula for situation 2, we can say that

1993_return of bond.png

Or to use the tables the change would be:

Present Value = 10 * (PV AF2, 0.1) + 100 * (PVIF2, 0.1)

Substituting the values we find that

Present Value = 100

This is no magic. When you are getting a 10 % return and expect a 10 % return, price you would pay would equal the par value of bond. This means that if we expect higher return i.e. 15% in situation (iii) above, price which we would be willing to pay for a bond returning only 10 % would be less than par value. In the same way, if we expect lower return, i.e., 7% in situation (i) above, price that we would be willing to pay for a bond returning 10 % would be higher than par value. Can you find out the values for these two cases?

There are five variables in this case: (1) present value (2) future value (3) interest amount paid (4) return expected and (5) time period. Properties of mathematics say that if any four of these five variables are given, you can always find value of fifth variable. You can attempt that yourself or turn over to solve illustrations to look at a similar case.

 

 


Related Discussions:- Determine the example of rate of return of a bond

Minimum bonus and maximum bonus, Question 1 Sections 42 to 50 of the Act d...

Question 1 Sections 42 to 50 of the Act deal with provisions pertaining to welfare of workers. State a few welfare measures that you would suggest in factories. List the welfare m

Define the financial leverage effect, What is the financial leverage effect...

What is the financial leverage effect and what causes it?  What are the potential benefits and negative consequences of high financial leverage? Financial leverage is the extra

Explain the structure of financial systems, Explain the structure of financ...

Explain the structure of financial systems In direct finance borrower-spenders borrow funds straight from lenders in the financial markets by selling them securities. In indire

Define deadweight loss, What is meant by deadweight loss?  Why does a price...

What is meant by deadweight loss?  Why does a price ceiling usually result in a deadweight loss? Deadweight loss considers to the benefits lost to either consumers or producers

Export/import bank (eximbank), Export/Import Bank (Eximbank) Federal Im...

Export/Import Bank (Eximbank) Federal Import-Export Bank, whose mainly function originally was to compensate U.S. exporters for subsidies approved competitors by foreign govern

Explain the term phishing, QUESTION (a) (i) Describe briefly two potent...

QUESTION (a) (i) Describe briefly two potential E-Banking risks that may have an adverse impact on banks. (ii) Outline some measures to control these two risks. (b) Outli

Sources of risk, Define Sources of risk with types???? how can we analys...

Define Sources of risk with types???? how can we analysis the risk in bussiness?? plese help!!!!!

Preemptive right protect the interests of existing stockhold, How does a pr...

How does a preemptive right protect the interests of existing stockholders? A preventive right protects the interests of existing stockholders by giving them the opportunity to

What are the options available for growth, What are the options available f...

What are the options available for growth Joint venture   A joint venture is when a separate company is formed, in which every member holds an equity st

Briefly explain suppliers and customers, Suppliers and customers Suppli...

Suppliers and customers Suppliers as well as customers are external stakeholders with their own set of objectives profit for the supplier and possibly customer satisfaction wit

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd