Explore BrainMass

Explore BrainMass

    Bond Valuation

    Corporations raise money in two ways: by issuing stocks (equity financing) or by borrowing money (debt financing). Like individuals, businesses may take out mortgages, loans and lines of credit to finance items such as property, plant and equipment, new projects, and inventories as well as to cover expected cash shortfalls. However, unlike individuals, corporations and governments also have the option of issuing bonds. Bonds are a type of security; in essence, bonds are a corporation's promise to pay a specified amount at a future date. Investors buy bonds at an amount equal to the present value of this future payment (or the sum of the discounted future payments expected from the bond). They do this in order to earn interest from the purchase of the bond. Therefore, it is important to be able to price the present value of a bond.

    Zero-coupon bonds: A corporation promises to pay a specified amount (typically $1,000) at a future date. This is the face value of the bond. Investors will buy this bond from the corporation at the present value of this one future payment. The present value of a zero coupon bond can be found using the present value formula.

    Where PV = the present value, or the price of the bond
    FV = face value or future value (the specified amount the corporation has promised to pay at the end of the life of the bond)
    r = the interest rate the investor expects to receive
    n = the number of periods in the life of the bond

    Coupon bonds: A corporation promises to pay a specified amount (the face value - typically $1,000) at a future date as well as periodic payments, typically annually or semi-annually (coupon payments). Corporations will often promise to make periodic payments in order to increase the present value of the bond. As result, investors are willing to pay more for coupon paying bonds than they would if the corporation simply issued zero-coupon bonds. Furthermore, coupon bonds may be seen as less risky since the corporation must meet its interest obligations periodically, rather than defer all payments to the end of the life of the bond. As a result, investors may charge the corporation less interest than they would for a riskier bond. Therefore, coupon bonds have two advantages: corporations get more money today for the bonds they issue, and they may save money on reduced interest rates, making borrowing cheaper. Below is an example of a five-year coupon-paying bond with a 5% discount rate, a face value of $1,000 and an annual coupon payment of $50.

    Referring to the diagram above, one will notice that the present value of a coupon bond is equal to the sum of the coupon payments discounted to present value plus the amount of the face value of the bond to be paid at the end of the bond's life, discounted to present value as well.

    Where C = the amount of the coupon payment
    M = the amount of the principle to be repaid

    To use this formula, we are required to calculate the present value of each coupon payment. If the bond extends over a longer period of time, these calculations may become tedious. Similarly, if we change the coupon payment or interest rate, all the calculations must be done again. As a result, we often simplify these calculations. If we look closely, we notice that the sum of the coupon payments may simply be found by using the annuity formula.

    By adding the present value of the future principle payment, we get a simplified formula for the present value of a coupon bond. 

    Photo by Austin Distel on Unsplash

    © BrainMass Inc. brainmass.com September 25, 2023, 9:33 am ad1c9bdddf

    BrainMass Solutions Available for Instant Download

    Determining the Spread of Two Securities

    Category: Business / Finance / The Discounted Cash Flows Model Determination Basis Points Determination of the basis point spread of two securities with different maturities discount and premium based on their yields to maturity. The spread between TEX corporation's note with a coupon of 6.5%, seven-year remaining term

    Calculating Bond Price and Yield to Maturity

    Siddhartha Bank has a bond currently trading at NEPSE @ Rs. 1200 per bond, the bond has remaining maturity period of 6 years, the bond pays 10% coupon rate on face value. The current market interest rate is 12%, value this bond with appropriate valuation model and decide whether you invest in this bond or not, why? Also exp

    Valuing Bond prices, spreads, and yields

    6. The spread between ACME corporation's note with a coupon of 6.5%, seven-year remaining term, and selling for 101-3/8 and ACME corporation's debenture with a coupon of 9.5%, 18-year remaining term and selling for 98-3/4 is a. 338 basis points. b. 339 basis points. c. 340 basis points. d. 341 basis points. 8. The asking

    Yield to Call (YTC) and Yield to Maturity (YTM) of bonds

    Southern Bell has issued $1000 par, 43/8% coupon bonds that mature in 6 years. The coupons on these bonds are paid semiannually. These bonds are currently trading at a price of $853.75. The bonds are callable in 2 years at a call price of $1000. a. Compute the Yield-To-Maturity (YTM) on the bonds. b. Compute the Yiel

    Present value of a treasury bond and yield to maturity problem

    A treasury bond makes semi-annual payments of $300 for 10 years. At the end of 10 years, the bonds principal amount of $10,000 is paid to the investor. (a) What is the present value of the bond if the annual interest rate is 5%? (b) Suppose the bond is observed trading at $11,240. What discount rate are investors using to

    Investments for Tax Purposes

    Following is a problem and the answer. Can anyone explain the steps that were used and why? Is there an easier way to perform the calculations? A Taxpayer is considering three alternative investments of $10,000. Assume the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in

    Wealth Management Portfolio

    Bond portfolio - Wealth Management Portfolio Please provide assistance for below questions I am facing. I am looking for assistance to work on a diversify fixed income portfolio that can provide 3% to 6% yield in return. I am looking to for a key background history about what happened to Bond market in 2015, and provide

    Calculation Bond Value

    Suppose that General Motors Acceptance Corporation issued a bond with 10 years until maturity, a face value of $1,000, and a coupon rate of 7.2% (annual payments). The yield to maturity on this bond when it was issued was 6.1%. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it ma

    Issues involved with pegging or floating the yuan to US dollar

    Prior to the financial crisis in 2007/2008, the U.S. Treasury Department as well as Congress had been asking China to revalue upwards the value of their Renminbi or Yuan. China responded to these repeated requests by allowing the Yuan to trade within a narrow band. The band itself was then shifted upwards or downwards by small i

    Ratio analysis for Coca Cola

    In 2 to 3 pages, research a company that is publicly traded on the US stock exchanges (NASDAQ, AMEX, NYSE). Find the ticker symbol, describe the industry and business the company is in, find the 10k statement and focus on the financial statements found there. Determine the three ratios which best help you determine the financ

    Relationship between bonds and interest rates

    What is the relationship between bonds and interest rates? What are the calculations involved with pricing a bond and a stock? Choose a stock that is publicly traded and explain how you think the future potential of the stock warrants the price it sells at today - please explain and support with terms and concepts. Calculate

    Asset Valuation: Atlantic Airlines Case

    Atlantic Airlines Case Atlantic Airlines issued $100 million in bonds in 2008. Because of the firm's low credit rating (B3), the bonds were considered junk bonds. At the time of the issue, the 20 year bonds were paying a yield of 12 percent. Investor Tom Phillips thought the yield on the bonds was particularly attractive an

    Bond Yield to Maturity - Debt Financing

    Tidewater Home Health Cae, Inc. has a bond issue outstanding with eight years remaining to maturity, a coupon rate of 10 percent with interest paid annually, and a par value of $1,000. The current market price of the bond is $1,251.22. a. What is the bond's yield to maturity? b. Now, assume that the bond has semiannual coupon

    Present Value of Bond Calculation

    Given a 5 year instrument with a face value amount of $1000 an annual interest rate of 9%, with semiannual interest payments and repayment at the end of 5 years, set up the calculation of the PV of cash flows at 11% yield. Would the value of this note be greater than, less than or equal to $1000? Why? **Please write out formula

    Valuation of Bonds & Stocks

    1. Distinguish between the types of bonds. What factors determine their value? Explain three important relationships that exist in bond valuation. 2. Distinguish between preferred stock and common stock. Compare valuing preferred stock and common stock.

    Bond Valuation

    Value the following bonds in a spreadsheet: a. 30 year bond paying 8% semiannually at a yield to maturity of 9%. b. 25 year bond paying 9% quarterly, callable at end of year 6 at a call price of 105 at a yield to call of 4%.

    Stock's & Bond's Valuation; Time Value of Money

    Financial Management Problems 26. You need to accumulate $10,000. To do so, you plan to make a deposit of $1,250 per year - with the first payment being made a year from today - into a bank account that pays 12% annual interest. Your last deposit will be less than $1,250 if less is needed to round out to $10,000. How many

    Valuation of Preferred Shares

    5.26. Convertible preferred stock. Valerian Corp. has a preferred share issue outstanding that is convertible into common shares. Each preferred share can be converted into five common shares at the option of the holder. The preferred stock pays a dividend of $10 per share per year. The common stock currently sells for $20 per s

    Bonds with Semiannual Coupons

    A bond has a 25-year maturity, an 8% annual coupon paid semiannually, and a face value of $1,000. The going nominal annual interest rate (rd) is 6%. What is the bond's price? See attached.

    Discount Bond: Definition, Properties, and Examples

    a. What is a discount bond? What will happen to the price of a discount bond as it approaches maturity? 1- Given TWO (2) identical bonds with the same coupon rate but different maturity dates, the bond with a longer maturity date is said to be more risky than the bond with a shorter maturity date. Why? 2- A bond is call

    Government Securities

    Can you please answer in detail the following question: Government Securities. What is the difference among T-Bonds, T-Notes, T-Bills and Municipal bonds? What is a yield curve?

    Bond Duration and Immunization

    I need to write conceptualizing these questions: 1. Why are bonds considered as less risky investments than as stocks? 2. Discuss duration and portfolio immunization.

    Bond pricing using zero coupon bonds

    A 7% annual coupon bond (face value $1,000), with three years left till maturity is selling for $986.90. Zero-coupon bonds of 1, 2, 3 years maturity (all with face value of $1,000) sell for $950, $900, $820,respectively. Is this coupon bond properly priced? If not, show an arbitrage transaction to profit $2000 (today) from the m

    Value of 2 bonds with 20-year maturity

    Of the 2 bonds, which is the better buy? Given a bond with 20 year maturity that pays coupons 4 times per year, 8% interest rate & is selling to yield 6%. What is the current price per bond? The other bond pays once per year, 20 year maturity, 8% coupon, selling to yield 6.2 percent. What is the current price of the bond?

    Bond Valuation - Bond pricing

    A bond has a face value of $1000 and has 3 full years to maturity. It pays an annual coupon of 10% and is currently yielding 6% per annum to maturity. What is the price of the bond? Also, suppose the credit perception of the company improves at the end of year one. At the very beginning of year two (ie 2 coupons remaining) wh

    Interest Expense on Bonds

    On January 1, 2014, HVAC, Inc. issued $50,000 of ten-year 6% bonds for $43,800. Interest was payable semiannually. The effective yield was 8%. The effective interest method of discount amortization was used. What amount of interest expense should be recorded for the six-month period ending December 31, 2014? And how did you g

    Bond Amorization and Journal Entry

    On January 1, 2013, Slapshots issued $200,000 bonds with an 8% stated interest rate. The bonds pay interest on June 30 and December 31. The bonds are due on December 31, 2022. 1. Assume the bonds were sold for $175,075.58 to yield 10%. Prepare a bond amortization schedule for the first year of the bond life using the effec

    Using T-bill Interest Rates to Determine Forward and Future Contract Rates

    Suppose the current yields to maturity on 3 month and 6 month T-Bills are 4.0 percent and 5.0 percent, respectively (yields will need to be converted to 90-day returns). (a) In perfectly efficient markets and risk-neutral pricing, what yield should you expect to find on a 3 month T-bill forward contract deliverable in 3 months?

    Bond Fundamentals

    Bond Fundamentals ________________________________________ Question 1: Explain the difference between calling a bond and bond refunding. Question 2: Identify the three most important determinants of the price of a bond. Describe the effect of each. Question 3: Given a change in the level of interest rates, discuss how tw