G Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond A has a maturity of 15 years, and Bond B has a maturity of 1 year. What will be the value of each of these bonds when the going rate of interest is: (1) 5%, (2) 8%, and (3) 12%? Assume that there is only one more interest payment to be made on Bond B. Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?
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:
G Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond A has a maturity of 15 years, and Bond B has a maturity of 1 year.
- What will be the value of each of these bonds when the going rate of interest is:
(1) 5%, (2) 8%, and (3) 12%?
Assume that there is only one more interest payment to be made on Bond B.
- Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?
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