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A bond is a tool used in financial economics to ensure debt security and function as fixed-income financial assets. Like any other asset, the set of payments or income one expects to receive is in present value. This makes the value of payments decrease when market interest rates go up. The value of bonds decrease when inflation is high which reduces the value of the payments.

Credit institutions, companies, corporations, and the government can issue bonds. Bonds vary in by how they mature, their initial set amount, interest rate and return. The principal or nominal amount is the amount of interest the issuer pays. The maturity date is the date when the issuer has to repay the nominal amount and can be set at short term, medium term, or long-term bond maturities. The interest rate that the issuer pays to the holder is the coupon, and is fixed from the start of the bond. The rate of return from the investment of the bond is called the yield and can be measured with market price taken into account.

Bonds provide issuers with a less expensive way to set up long term financing and borrowing. The reason why investors buy bonds is because they can get a return on their investment with relatively low risk. Bond markets have a supply and demand, just like any other market.

There are two main types of bonds – fixed rate bonds (or fixed income bonds) and floating rate bonds. Fixed income bonds are consistently paid over a period of time, known as coupons. Fixed income security is equivalent to a future series of cash flows¹. The value of fixed income bonds is calculated by its yield, which is the calculation of internal rate of return. Risk is the main factor in assessing a bond’s value. Credit risk is the main risk to investors and a higher credit risk means greater yields. Floating rate bonds may regular payments but at a variable rate. A coupon will increase when short term dates rise.



1. Bonds Explained. Retrieved from

Sirius Satellite Radio: Valuing Bonds

You are an intern with Sirius Satellite Radio in their corporate finance division. The firm is planning to issue $50 million of 12% annual coupon bonds with a 10-year maturity. The firm anticipates an increase in its bond rating. Your boss wants you to determine the gain in the proceeds of the new issue if the issue is rated abo

Pay-Through Securities Question

The African Development Bank (ADB) wants to securitize $500 million of its loans (with the weighted average interest rate of LIBOR plus 185 basis points) in the form of pay-through securities. Class A bonds account for 80% of the total bonds and they are assigned AA rating and sold at LIBOR plus 40 basis points. Class B bonds

Payback Period, NPV, PI, IRR, and MIRR

Question 1 Delicious Snacks, Inc. is considering adding a new line of candies to its current product line. The company already paid $300K for a marketing research that provided evidence about the convenience of this product at this time. The new line will require an additional investment of $70K in raw materials to produce the

Valuation of Yahoo! Inc.

This question requires you, among other things, to calculate the stock price for Yahoo! Inc. (YHOO); and provide the needed analysis as asked in what follows. Here is what you need to do for this question. Obtain the latest financial info/statements for Yahoo! Inc. (ticker YHOO), also identify its peer companies and obtain pric

Weighted Average Cost of Capital and Net Present Value

Ember is considering an investment of $40 million in plant and machinery. This is expected to produce free cash flows of $13 million in year 1, $14 million in year 2, $15 million in year 3, and 25 million in year 4. The tax rate is 35%. You don't know the target capital structure, but you do have the following information:

10-year Term Premium

How is the 10-year term premium calculated? "Treasuries traded yesterday at the most expensive levels in more than six weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.94 percent, the most costly since Oct. 3. A negati

Calculate the price and return in the given case.

Assumptions : All payments occur at the end of the period unless stated otherwise. Interest is compounded annually unless stated otherwise. Face value of all bonds is $1000. Starbucks has one debt issue outstanding. The debt matures on August 15, 2017, and has a 6.25% coupon. Coupons are paid semiannually. The bond is

Stock Valuation versus Bond Valuation

Why is stock valuation considerably less precise than bond valuation? Can you give at least two reasons. Would it be possible to provide some industry references? Thank you.

Money Market problems

Q1. A bond you are evaluating has $1,000 face value, 8% coupon rate (paid annually) and 4 years remaining to maturity. Calculate its present value if the market rate of interest is: (a) 10% : $ _________ (b) 8% : $ _________ (c) 6% : $_________ (d) What do your answers to (a) through (c) say about the relationship bet

Time Value of Money Concepts

1. Assuming that the current interest rate is 3 percent, compute the value of a three year, 5 percent coupon bond with a face value of $1,000. What happens when the interest rate goes to 4 percent? What happens when the interest rate goes to 2 percent? 2. Some friends of yours have just had a child. Thinking ahead, and real

Deficit spending, debt and interest expense

1. Suppose the federal government balanced the budget and no longer ran a deficit. Despite this action, interest on the federal debt is still substantial. As a public finance topic, comment on this statement. 2. Analyze and explain on the trend of federal government expenditures and in your opinion, what action(s) if possibl

Find the bond values and yields in the given cases.

Problem 1 Suppose a corporation's bonds have 8 years remaining to maturity. In addition, suppose the bonds have a $1000 face value, and the coupon interest rate is 7%. The bonds have a yield to maturity of 10%. Complete parts (a) and (b) below. a) Compute the market price of the bonds if interest is paid annually. b) Compute

Money & Banking

In Table 5.5, show the derivation of each of the following entries: a The interest rate of 5.1 percent on a bond sold in 2011 that matures in 7 years. b The interest rate of 4.4 percent on a bond sold in 2014 that matures in 5 years. c The interest rate of 4.5 percent on a bond sold in 2018 that matures in 2 years. T


1. Which of the following is not a characteristic of a corporation? A. Continuous life B. Ease of capital accumulation C. Separate legal entity D. Unlimited liability of stockholders 3. On Thursday, May 3, Skelton Electrical Supply issues 4,000 shares of $6 par value common stock at $9 per share. Which of the follow

Problems on interest rate and yield to maturity

Interest rate and yield to maturity. You can use excel or financial calculator:   1.    What is the fair value of a 2-year $100,000 T-note with no coupon payment if the current market interest rate is 10%? 2.    If you obtain a 30 year mortgage loan of $100,000, find your monthly payment if annual interest rate is 3%,

How much is the bond worth today?

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment? A. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for

Finance Questions and Problems

1. The probability distribution of a less risky return is more peaked than that of a riskier return. What Shape would the probability distribution have for (a) completely certain returns and (b) completely uncertain return? 2. Suppose you owned a portfolio consisting of $250,000 of US gov bonds with a maturity of 30 years

Create a timeline in Excel for five years.

"You are a new analyst for a large brokerage firm. You are anxious to demonstrate the skills you learned in your MBA class and prove that you are worth your attractive salary. Your first assignment is to analyze the stock of the General Electric Corp. Your boss recommends determining prices based on both the dividend-discount

Effect of a Bond Purchase on a Bank's Balance Sheet

Assume that this balance sheet portrays the state of the banking system. The banks have no excess reserves. Assets Liabilities Total reserves Transactions accounts $40 billion $160 billion Loans $50 billion Securities $70 billion Total Total $160 bill

Breakeven Interest Rate for Thompson Enterprises

Thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding bond. Ignore tax


Need some assistance with the attached problems. Thank you. potential of starting a series of restaurants


A 20-year, 8 % semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,000. (Assume that the bond has just been issued.) Complete the attached spreadsheet, answering the following: a) What is the bonds yield to maturity? b) What is the bond's current yield?


Please explain how government interaction in the U.S. economy can bring about market stability.

Investments: Hedging

XYZ investments is considering issuing a structured note known as a bear floater to a client, ABC insurance. A bear floater is a floating-rate note designed to allow an investor to profit from rising interest rates. Thus, an investor in a bear floater would be bearish on bond prices. Like an inverse floater, the bear floater can

OID Bond Questions

Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both

Bond rates are emphasized.

Question 1 A firm combines two resources, X and Y, to produce an output level Q in a purely competitive market. The cost of a unit of X is $15 and the cost of a unit of Y is $8. The marginal product of X is 30 units and the marginal product of Y is currently 24 units at output level Q. What would you recommend that the firm

MM Theory is applied.

1. Anderson's Furniture Outlet is levered firm with a tax rate of 34% and expected earnings before interest and taxes (EBIT) of $1,600. The company has $3,000 in bonds outstanding that have an 8% coupon and pay interest annually. The bonds are currently selling at par value. For simplicity, you may assume perpetual EBIT and perp

A strategy using derivatives is proposed.

Because of your impending MBA, you are the chair of the pension committee at the hospital where you work. Itââ?¬â?¢s a small, young hospital with a $40 million pension account-50% invested in an international bond index fund, and 50% invested in a S & P 500 index fund. Your economics/financial consultant expects a rise