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).
1. List the common elements of a submission for a major resource acquisition (purchase) 2. What is the difference between: A fixed asset and current asset? 3. If you worked i
Define and discuss indirect world systematic risk. The indirect world systematic risk can be illustrated as the covariance among a nontradable asset and the world market portfo
TYPES OF WORKING CAPITAL Working capital can be split up into two categories on the basis of time. They are Permanent Working Capital and Temporary or Variable Working capital
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
Explain the Advantagesand disadvantages of MBO Advantages of MBO Disadvantages of MBO Sale can be arranged quickly Manag
Issuing Procedure Treasury bills are sold using the auction procedure. The Treasury entertains both competitive and non-competitive tenders for T-Bills. Government securities f
Accounts receivable are sometimes not collected. Why do companies extend trade credit when they could insist on cash for all sales? Extending trade credit almost all the time le
how can management use financial ratios
What are the importance of leverage on a small scale firm?
This task must be completed in order from 1 to 11 as identified in both the Income Statement and the Balance Sheet. In addition, all answers must cite relevant supporting formulas
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