Why is it necessary to value a bond in terms of today's dollars?
What is the impact of an increase in the prevailing interest rate on the valuation of a bond?
What are some factors that affect the value of a corporate bond?
The response addresses the queries posted in 702 words.
//Prior to give further explanation of the bonds, it is better to understand what 'Bonds' are. By understanding the term clearly, the reader can understand better, the reason to give value a bond in terms of today's dollars. I am also including effective reasons for valuing the bonds in terms of today's dollars.//
A bond is a financial instrument which represents the debt of a borrower (issuer) towards lender (bondholder). Thus, it represents financial obligation on the part of the issuer to pay to the bondholder a defined stream of future cash flows consisting of coupon payments and principal repayments. Thus reasons for valuing a bond in terms of today's dollars are as follows:
1. Time Value of Money: a $ today is much more precious then in future. Same applies to the financial instruments with a slight difference that they move either upward or downward. To determine the true wealth of the lender or the liability of the issuer as of today, determining the current ...
The solution discusses why its necessary to value a bond in terms of today's dollars. The impact of an increase in the prevailing interest rate.