a. What is the payback period for this bond? b. With such a long payback period, is the bond a bad investment? c. What is the discounted payback period for the bond assuming its 4% coupon rate is the required return? What general principle does this example illustrate regarding a project’s life, its discounted payback period, and its NPV?
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:
1. Suppose that a 30-year Treasury bond offers a 5% coupon rate, paid semi-annually. The market
price of the bond is $1,000, equal to its par value.
a. What is the payback period for this bond?
b. With such a long payback period, is the bond a bad investment?
c. What is the discounted payback period for the bond assuming its 4% coupon rate is the
required return? What general principle does this example illustrate regarding a project’s
life, its discounted payback period, and its NPV?
2. Why is the NPV considered to be theoretically superior to all other capital budgeting techniques?
Reconcile this result with the prevalence of the use of
your CFO if she instructed you to use the IRR technique to make capital budgeting decisions on
projects with cash flow streams that alternate between inflows and outflows?
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