a. If the interest rate is 3.5 percent, what is the value of each bond today? Which bond is worth more? Why? (Hint: You can use a calculator, but the rule of 70 should make the calculation easy.) b. If the interest rate increases to 7 percent, what is the value of each bond? Which bond has a larger percentage change in value? c. Based on the example above, complete the two blanks in this sentence: “The value of a bond [rises/falls] when the interest rate increases, and bonds with a longer time to maturity are [more/less] sensitive to changes in the interest rate.”
a. If the interest rate is 3.5 percent, what is the value of each bond today? Which bond is worth more? Why? (Hint: You can use a calculator, but the rule of 70 should make the calculation easy.) b. If the interest rate increases to 7 percent, what is the value of each bond? Which bond has a larger percentage change in value? c. Based on the example above, complete the two blanks in this sentence: “The value of a bond [rises/falls] when the interest rate increases, and bonds with a longer time to maturity are [more/less] sensitive to changes in the interest rate.”
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
Bond A pays Rs. 80,000 in 20 years. Bond B pays Rs. 80,000 in 40 years. (To
keep things simple, assume these are zero-coupon bonds, which means the
Rs80,000 is the only payment the bond holder receives.)
a. If the interest rate is 3.5 percent, what is the value of each bond
today? Which bond is worth more? Why? (Hint: You can use a calculator,
but the rule of 70 should make the calculation easy.)
b. If the interest rate increases to 7 percent, what is the value of each
bond? Which bond has a larger percentage change in value?
c. Based on the example above, complete the two blanks in this
sentence: “The value of a bond [rises/falls] when the interest rate
increases, and bonds with a longer time to maturity are [more/less]
sensitive to changes in the interest rate.”
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