Find the price of the bond if ytm falls to 7% (use financial calculator or spreadsheet). b) What price would be predicted using duration only? c) What price would be predicted using duration and convexity?
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:
A 30-year maturity bond making annual coupon payments with a coupon rate of 12% has (modified) duration of 11.54 years and convexity of 192.4. The bond currently sells at a yield to maturity of 8%.
- a) Find the price of the bond if ytm falls to 7% (use financial calculator or spreadsheet).
- b) What price would be predicted using duration only?
- c) What price would be predicted using duration and convexity?
- d) What is the error (in %) for each rule? What do you conclude about accuracy of the two rules?
- e) Repeat the analysis with yields rising to 9%. Do your conclusions about accuracy hold up?
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