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

M.r, capital structure

capital structure

Budget classification on the basis of time, ON THE BASIS OF TIME • Lon...

ON THE BASIS OF TIME • Long term budget :  as per the National Association of Accountants, America, a long term budget is a systematic and formalized process for purposeful co

Discuss the techniques to manage risks, Q. Discuss the techniques to manage...

Q. Discuss the techniques to manage risks? Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of the four major categories li

Which is lower for company cost of debt or cost of quality, Which is lower ...

Which is lower for a given company:  the cost of debt or the cost of equity?  Explain.  Ignore taxes in your answer. The cost of debt is all the time less than the cost of equi

Determine the cost, a) Social marketing is the use of normal marketing meth...

a) Social marketing is the use of normal marketing methods to achieve the benefits of social change, such as informing the public about the harm of under-age drinking, rather than

State about the country analysis and political risk, Country analysis and p...

Country analysis and political risk Country analysis could use tools for example PEST factors in order to strategically analyse countries. Political risk

Miller approach of irrelevance of dividends, Q. Miller Approach of irreleva...

Q. Miller Approach of irrelevance of dividends? Discuss the Modigliani as well as Miller Approach of irrelevance of dividends. What are its drawbacks? Ans. Modigliani with M

Define multinational corporations (mncs), What are multinational corporatio...

What are multinational corporations (MNCs) and what economic roles do they play? A multinational corporation (MNC) can be described as a business firm incorporated in one count

Define the problems into capital budgeting analysis, What problems can take...

What problems can take place into the capital budgeting analysis if project debt is evaluated in place of the borrowing capacity created by the project? If project debt is grea

Explain risk adjusted discount rate method, Q. Explain Risk Adjusted Discou...

Q. Explain Risk Adjusted Discount Rate Method? In the risk adjusted discount rate method the future cash flow from capital projects are discount at the hazard adjusted discount

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