This graph shows the value of 10% coupon bonds of different terms across differing market interest rates. Each bond pays INT = $100 at the end of each year and returns M = $1,000 at maturity. For comparison, the blue line depicts the value of a one-year bond. The term of the other bond in years may be changed using the slider. Drag on the graph to change the current market interest rate (ra) at which the bond (orange curve) is evaluated. [Yrs INT Lei (1+ra) 15 ΣΕ M $100 $1000 1, 000 (1+ra)*75 =1 (1+0.100) (1+0.100)!5 Bond Value ($) 3,000 2,500 - 2,000 - 15-Year Bond 1,500 - 1,000,000- 1-Year Bond 500 10 10 15 20 25 Market Interest Rate (%) Yrs=15 10 15 20
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:
Use the graph to answer the following questions.
1. What is the value of a 15-year 10% $1,000 coupon bond when the market interest rate is 15%?
- $421
- $708
- $1,000
- $1,519
2. What is the value of a 12-year 10% $1,000 bond when the market interest rate is 5%?
- $1,000
- $1,050
- $1,443
- $2,200
3. What is the value of a 10-year 10% $1,000 bond when the market interest rate is 10%?
- $900
- $975
- $1,000
- $1,050
4. For a 10% $1,000 coupon bond, when the market interest rate is greater than 10%, the
- Is unaffected and still equals its par value of $1,000.
- Is less than its par value of $1,000.
- Is greater than its par value of $1,000.
- Cannot determine because it depends on the term of the bond in years.
5. For a 10%, $1,000 coupon bond, a longer-term bond (say, 15 years) is:
- less affected by changes in the market rate than a 1-year bond.
- affected the same by changes in the market rate than a 1-year bond.
- more affected by changes in the market rate than a 1-year bond.
- Cannot be determined.
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