Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1000 par value. Your required return on bond X is 10% and if you buy it you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 8.5%. How much should you be willing to pay for bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.)
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:
Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1000 par value. Your required return on bond X is 10% and if you buy it you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 8.5%. How much should you be willing to pay for bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.)
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
