Valuing an option-free bond, Financial Management

Assignment Help:

To value an option-free bond, we must determine the on-the-run yield curve for the particular issuer whose bond we have to value. This on-the-run yield curve used for valuation process is considered as the benchmark interest rates.

Let us consider the following on-the-run issue. The illustration deals with an option-free bond with four years remaining to maturity and a coupon rate of 6.5%.

Maturity

Yield to Maturity (%)

Market Price (in $)

 1 year

3.4

100

2 years

3.9

100

3 years

4.7

100

4 years

5.0

100

Each bond is trading at par value i.e., at $100, so the coupon rate is equal to the yield to maturity.

Using the bootstrapping method, the spot rates are determined as follows:

Years

Spot Rates (%)

1

3.3000

2

3.9098

3

4.8120

4

5.0586

Using spot rates, we can calculate the present value of the cash flows.

          2136_valuing opton free bond.png   = $105.374


Related Discussions:- Valuing an option-free bond

Regulatory aspect in employees provident fund organization, Regulatory Aspe...

Regulatory Aspect Employees Provident Fund Organization (EPFO) is under the Ministry of Labor and is a primary organization for retirement income for private employees in India

Understanding financial metrics and business risk, Controlling is an essent...

Controlling is an essential management function as efficient control mechanisms ensure that the performance of the company increases over time through the incorporation of feedback

., Identify and explain the key stages in the capital investment decision-m...

Identify and explain the key stages in the capital investment decision-making process and the role of investment appraisal in this process.

Explain factoring and term loan financing, A factoring company has offered ...

A factoring company has offered a one-year agreement with Glub Ltd to both manage its debtors and advanced 80 per cent of the value of all its invoices immediately a sale is invoi

Introduction to mortgage-backed securities, A mortgage may be defined as a ...

A mortgage may be defined as a pledge of property to secure payment of a debt. Depending upon the terms of mortgage agreed upon between the lender and the borrower, mor

Dividend decision, Dividend Decision: The Dividend Decision is a decis...

Dividend Decision: The Dividend Decision is a decision taken by the directors of a company. It relates to the timing of any cash payments and amount made to the company's stoc

Find out the price of equity shares., Following details are related to thre...

Following details are related to three companies which are identical except in terms of ''r''. Company ABC Ltd. MNC Ltd. XYZ Ltd. Cost of capital 10% 10% 10% Earn per

Show the current liabilities method, Q. Show the Current Liabilities Method...

Q. Show the Current Liabilities Method? Forecasting of Current Assets as well as Current Liabilities Method: - As-per to this method an estimate is made of forthcoming period's

Determine cost of redeemable debt, Q. Determine Cost of redeemable Debt? ...

Q. Determine Cost of redeemable Debt? Cost of redeemable Debt: - Usually a company issues a debt which is redeemable subsequent to a certain period during its life-time. Such a

Cash flow duration, Cash flow duration, like effective duration, cons...

Cash flow duration, like effective duration, considers the change in the cash flow due to prepayment with the change in the interest rate. In effective duration,

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