Company XYZ has a liability of $100 million due in 5 years. The company’s only asset is $70 million held in cash. Throughout this question, assume the term structure of interest rates is flat at 10%. Two bonds, A and B, are currently trading in the market. Bond A is a 3-year coupon bond with a face value of $100, selling for $93.783; coupons are paid annually. Bond B is a perpetuity with an initial cash flow of $5 in one year’s time, with cash flows growing thereafter at 2% per year. a). Calculate Bond A’s Macaulay Duration. Without recalculating the bond price, estimate the percentage change in the price of Bond A if the entire term structure were to immediately shift upwards by 100 basis points (1 basis point is one hundredth of 1 percent, i.e. 0.01%).
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:
Company XYZ has a liability of $100 million due in 5 years. The company’s only asset is $70 million held in cash. Throughout this question, assume the term structure of interest rates is flat at 10%.
Two bonds, A and B, are currently trading in the market. Bond A is a 3-year coupon bond with a face value of $100, selling for $93.783; coupons are paid annually. Bond B is a perpetuity with an initial cash flow of $5 in one year’s time, with cash flows growing thereafter at 2% per year.
a). Calculate Bond A’s Macaulay Duration. Without recalculating the
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