Jenna bought a bond that was issued by Sherlock Watson Industries (SWI) three years ago. The bond has a $1,000 maturity value, a coupon rate equal to 9%, a market rate (yield to maturity) of 10%, and it matures in 17 years. Interest is paid every six months; the next interest payment is scheduled six months from today. If the yield on a similar risk investment is 11%, what is the current market value (price) of the bond? What is the capital gains yield, current yield, and total yield that will be earned if the bond is held until it matures? Assume that the market rate does not change from now until maturity. Suppose that Jenna wants to sell her bond seven years from today when 10 years remain until maturity. If the market rate is 8% at the time she sells the bond in seven years, for what price will Jenna be able to sell the bond? What would be the capital gains yield, current yield, and total yield that the new investor will earn if he/she holds the bond until it matures 10 years later?
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:
Jenna bought a bond that was issued by Sherlock Watson Industries (SWI) three years ago. The bond has a $1,000 maturity value, a coupon rate equal to 9%, a market rate (yield to maturity) of 10%, and it matures in 17 years. Interest is paid every six months; the next interest payment is scheduled six months from today.
- If the yield on a similar risk investment is 11%, what is the current market value (price) of the bond?
- What is the
capital gains yield, current yield, and total yield that will be earned if the bond is held until it matures? Assume that the market rate does not change from now until maturity. - Suppose that Jenna wants to sell her bond seven years from today when 10 years remain until maturity. If the market rate is 8% at the time she sells the bond in seven years, for what price will Jenna be able to sell the bond? What would be the capital gains yield, current yield, and total yield that the new investor will earn if he/she holds the bond until it matures 10 years later?
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