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Factors that affect the Valuation of Bonds

Explain how each of the following factors affect the valuation of a
firm's bonds assuming that all other factors remain constant:

1) An increase in the general level of interest rates;
2) An increase in foreign competition; and
3) An increase in the firm's balance sheet debt.

Solution Preview

1. When the general level of interest rate rises, the value of the bond falls. This is the investors would like to invest in new bonds which offer a higher rate and hence the price has to ...

Solution Summary

The solution explains the effect on the value of bonds of the changes is general level of interest rates, foreign competition and an increase in the firm's balance sheet debt.

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