Consider three bonds with 5.10% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years. a. What will be the price of the 4-year bond if its yield increases to 6.10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be the price of the 8-year bond if its yield increases to 6.10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What will be the price of the 30-year bond if its yield increases to 6.10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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:
Consider three bonds with 5.10% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years.
a. What will be the price of the 4-year bond if its yield increases to 6.10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What will be the price of the 8-year bond if its yield increases to 6.10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. What will be the price of the 30-year bond if its yield increases to 6.10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
d. What will be the price of the 4-year bond if its yield decreases to 4.10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
e. What will be the price of the 8-year bond if its yield decreases to 4.10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
f. What will be the price of the 30-year bond if its yield decreases to 4.10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
g. Comparing your answers to parts (a), (b), and (c), are long-term bonds more or less affected than short-term bonds by a rise in interest rates?
h. Comparing your answers to parts (d), (e), and (f), are long-term bonds more or less affected than short-term bonds by a decline in interest rates?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
