Mark Goldsmith’s broker has shown him two bonds issued by different companies. Each has a maturity of 5 years, a par value of $1,000, and a yield to maturity of 7.5%. The first bond is issued by Crabbe Waste Disposal Corporation and has a coupon rate of 6.324% paid annually. The second bond, issued by Malfoy Enterprises, has a coupon rate of 8.8% paid annually. D. Assume that Mark will reinvest all the interest he receives as it is paid, and his rate of return on reinvested interest will be 10%. Calculate the total dollars that Mark will accumulate over 5 years if he invests in Crabbe bonds or Malfoy bonds. Your total dollar calculation will include the interest Mark gets, the principal he receives when the bonds mature, and all the additional interest he earns from reinvesting the coupon payments that he receives. E. The bonds issued by Crabbe and Malfoy might appear to be equally good investments because they offer the same yield to maturity of 7.5%. Notice, however, that your answers to part d are not the same for each bond, suggesting that one bond is a better investment than the other. Why is that the case?
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:
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D. Assume that Mark will reinvest all the interest he receives as it is paid, and his
E. The bonds issued by Crabbe and Malfoy might appear to be equally good investments because they offer the same yield to maturity of 7.5%. Notice, however, that your answers to part d are not the same for each bond, suggesting that one bond is a better investment than the other. Why is that the case?
Given information:
Maturity is 5 years
Par value of bond is $1000
YTM is 7.5%
Coupon rate of Crabbe Waste Disposal Corp is 6.324%
Coupon rate of Malfoy Enterprises is 8.8%
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