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).
Shareholders versus Managers A Limited Liability company is possessed by the shareholders though in most of the cases is managed by a board of directors selected by the shareho
Financial Ratios: Another method of measuring and monitoring performance is through the use of financial ratios and other comparative tools. Financial ratios use information
Q. Example on Controlling working capital? Describe how a manufacturing company could control its working capital levels and impact of the suggested control measures. Solut
Explain how a firm determines the optimal level of current assets. The best possible level of working capital is determined by finding the amount that balances the need for liq
QUESTION Part A: 1. Nev Plc is considering to invest in a machine to manufacture a new line of umbrellas. The following data has been assembled in respect of the investment:
Matching or Accrual The accrual concept makes a distinction among the receipt of cash and the right to receive it, and the payment of cash and legal obligation to pay it.
Market participants' measure the default risk of an issue on the basis of the credit ratings that the credit rating agencies assign to the issues. Once rating is
Q. Explain what is Comprehensive Income? Comprehensive Income - Change in EQUITY of a business enterprise during a period from transactions and other circumstances and events f
Your construction company is evaluating the proposed acquisition of a new earthmover. A consulting company you hired developed the following analysis last year at a cost to you of
How can secondary market organised the exchanges and over the counter markets? Exchanges and over-the-counter (OTC) markets: Secondary markets can be organised by exchanges
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