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

Importance of wbs in the project communication process, Due to the complex...

Due to the complexity of the tasks involved in many projects, communication of responsibility for those tasks is often helped by means of graphical planning techniques.

Financial reporting, Financial Repor ting The process of prepar...

Financial Repor ting The process of preparing the corporation's financial statements in accordance with generally accepted accounting principles. The statements prepare

Please help me solve this question, there are 3 compaies i have to find out...

there are 3 compaies i have to find out the price of equity share by using walters and gordons model.

Evaluate the fair value of the net assets, Treatment of PER IFRS 3 Bu...

Treatment of PER IFRS 3 Business combinations necessitate goodwill on gaining to be calculated at the date control is gained. The second gaining gives ROB a 75% holding and

Explain benefits of currency option contract as hedging tool, What are the ...

What are the advantages or benefits of a currency options contract as a hedging tool compared with the forward contract? Answer:  The major advantage of by using options contra

Describe personal financial management., Gary and Joyce Yau, both 30, last ...

Gary and Joyce Yau, both 30, last month bought their dream house in London, Ontario. The purchase price was $450,000 plus addition fees such as taxes, legal fees, administration fe

Analyse financial statements - strength of business, Learning outcome to be...

Learning outcome to be assessed: analyse financial statements to make decisions on the strength and adaptability of a business. A numerical analysis of the financial statements of

Calculate rate of return on investment in terms of us dollar, Mr. James K. ...

Mr. James K. Silber, an avid international investor, just sold a share of a French company, for FF50. The share was bought for FF42 a year ago. The exchange rate is FF5.80 each U.S

What is public finance, What is Public Finance Central, state as well...

What is Public Finance Central, state as well as local governments handle large sums ofmoney, which are received from several sources and should be utilized in accordancewith

Define flotation costs affect cost of raising that capital, When a company ...

When a company issues new securities, how do flotation costs affect the cost of raising that capital? While a company issues new securities flotation costs raise the cost of rais

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