Interest rate risk is important in bond valuation. High coupon bonds are considered “safer” than otherwise identical bonds with lower coupons with low interest-rate risk. However, one potentially undesirable feature of high-coupon bonds is to bear the reinvestment risk at prevailing market rates a few years later. Discuss the trade-off between interest rate risk and reinvestment risk using a zero-coupon bond and a high coupon bond as examples.
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:
Interest rate risk is important in bond valuation. High coupon bonds are considered “safer” than otherwise identical bonds with lower coupons with low interest-rate risk. However, one potentially undesirable feature of high-coupon bonds is to bear the reinvestment risk at prevailing market rates a few years later. Discuss the trade-off between interest rate risk and reinvestment risk using a zero-coupon bond and a high coupon bond as examples.
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