Assuming zero-coupon yields on default-free securities are as summarized in the following table: Maturity (years) 1 2 3 4 5 Zero-coupon YTM 4.6% 5.0% 5.4% 5.8% 6.1% Consider a five-year, default-free bond with annual coupons of 5% and a face value of $1000. a. Without doing any calculations, determine whether this bond is trading at a premium or at a discount. Explain. b. What is the yield to maturity on this bond? c. If the yield to maturity on this bond increased to 5.2%, what would the new price be
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:
Assuming zero-coupon yields on default-free securities are as summarized in the following table:
Maturity (years) 1 2 3 4 5
Zero-coupon YTM 4.6% 5.0% 5.4% 5.8% 6.1%
Consider a five-year, default-free bond with annual coupons of 5% and a face value of $1000.
a. Without doing any calculations, determine whether this bond is trading at a premium or at a discount. Explain.
b. What is the yield to maturity on this bond?
c. If the yield to maturity on this bond increased to 5.2%, what would the new price be?
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