Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Typically in a bond, we find an inverse relation between the price and the required yield. We know that the price of the bond is the present value of cash flows. If the required yield increases, the present value of the cash flow declines and hence the bond value also declines. Let us compute the relationship between the price and the required yield for a bond with a coupon rate of 10% with par value of Rs.100 maturing after 10 years for different required yields as per the table given below:
Table 1: Price-Yield Relationship
Yield (in %)
Price in Rs.
4
148.70
6
129.40
8
113.40
10
100.05
12
88.70
14
79.16
16
71.53
18
64.04
Figure 1: Price/Yield Relationship for an Option Free Bond
If we plot a graph the price-yield relationship, we get a convex curve as seen above in the graph. This convexity has important implications with investment characteristics of a bond. Whenever yields in the market change, the bond prices also change to compensate the yield expectations of the investor. For example, if the coupon rate of a bond is 11% and the present market coupon rate for similar bonds is 12%, then the bond value gets depleted as it yields only 11% as against the current market yield of 12%. Conversely, if the current market yield is 9.5%, then the bond gets traded at premium as the bond under reference gives an yield of 11% as against the current yield of 9.5%. When the bond is sold below par value, then it is said to be sold at a discount. When the bond is sold above par value, it is said to be traded at a 'premium'. It can be summed up as follows:
Coupon rate = Required yield then price = Par value
Coupon rate < Required yield then price < Par (discount)
Coupon rate > Required yield then price > Par (premium).
Net Present Value (NPV) : In this technique, future cash flows are discounted to the present and then compared with the investment outlay. The basic discount rate is generally
You are currently an Analyst working for a finance publication firm and as part of your responsibilities; you are required to provide a monthly forecast and analysis of certain com
Failure of mergers and takeovers Failure of mergers and takeovers Poor strategic plan will result in slow or failed integration. Integra
What are the financial management problems Traditional approach was challenged was that the treatment was built too closely around episodic events, like incorporation, promotio
When an investor invests in fixed income securities, he receives returns from one or more of the following sources: Coupon Interest payment.
Currently, many foreign firms from both developed and developing countries obtained high-tech U.S. firms. What might have motivated these firms to obtain U.S. firms? Answer: Se
Inventory is sometimes thought of as a necessary evil. Explain. Inventory ties up funds and these funds aren't earning an unambiguous return. Some inventory is habitually nec
Financial intermediaries Financial intermediaries are significant to the efficient functioning of the financial markets as they act to bring the borrowers/companies and lenders
What are the pros and cons of commercial paper relative to bank loans for a company seeking short-term financing? Commercial paper is generally a cheaper source of short-term f
Parallel T rade It is a form of countertrade that involves the execution of 2 distinct and individually enforceable contracts: the first for the sale of goods by an exp
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!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd