Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 8% (regardless of the time-to-maturity of the loan). Further suppose that there is a two-year coupon bond trading with a face value of $100 and a coupon rate of 5% trading in the market. Price the bond using an explicit no-arbitrage argument. Question: Suppose that the bank stated previously is still around. Consider a gold mine that will produce annual cash flows of $100 (with certainty) for five years starting in two years, i.e. from t = 2 to t = 6. What is the arbitrage-free price of the gold mine?
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:
Suppose that there is a bank that is offering to lend and/or borrow money at
an interest rate of 8% (regardless of the time-to-maturity of the loan).
Further suppose that there is a two-year coupon bond trading with a face
value of $100 and a coupon rate of 5% trading in the market. Price the bond
using an explicit no-arbitrage argument.
Question: Suppose that the bank stated previously is still around. Consider
a gold mine that will produce annual cash flows of $100 (with certainty)
for five years starting in two years, i.e. from t = 2 to t = 6. What is the
arbitrage-free price of the gold mine?
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