What is the price of a bond with a coupon rate of 5.20% and semi-annual payments, if the yield-to-maturity is 10.20% and the bond matures in 20 years? Assume a par value of $1,000.
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:
Time value of money :— According to this concept, value of money in present day is greater than the value of same sum of money in future date.
Present value :— It is the value of future cash flows in present day.
Present value = Future Value/(1+i)n
Or
Present Value = Future value × Present Value Factor @i% for n Period.
And
Present value = Periodic cash flow × Present Value Annuity Factor @i% For n period
Bond :— It is one of the source of capital that pays fixed periodic interest and principal at the end of maturity term of bond.
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