Explain which bond will trade at higher price in the market

Assignment Help Financial Management

Reference no: EM133670502

Discussion Post

In Chapters 5 , 6, and 7 of Ross, et al (2022) textbook you learned about the concept of time value of money and how it is applied for bond valuation. View the following YouTube videos:

A. Time Value of Money TVM Lesson/Tutorial Future/Present Value Formula Interest Annuities Perpetuities. (2014). [YouTube Video].
B. Chapter 7 : Interest Rates and Bond Valuation. (n.d.). [YouTube Video].

Once viewed discuss the following with your peers:

Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor Corporation, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, TMCC promised to repay the owner of each security $100,000 on March 28, 2038, but investors would receive nothing until then. Investors paid TMCC $24,099 for each of these securities; so they paid $24,099 on March 28, 2008 for the promise of a $100,000 payment 30 years later.

A. Why would TMCC be willing to accept such a small amount today ($24,099) in exchange for a promise to repay about four times that amount ($100,000) in the future?

B. A feature of this particular deal is that TMCC has the right to buy back the securities on the anniversary date at a price established when the securities were issued. What impact does this feature have on the desirability of this security as an investment?

Assignment: Bond Valuation

Based on the content covered in Week 5 and Chapters 5, 7 and 7 of the Ross, et al. (2022) text, students learned about time value of money and its application to bond valuation. Students should address the following:

Two bonds A and B have the same credit rating, the same par value, and the same coupon rate.

Bond A has 30 years to maturity and bond B has 5 years to maturity.

A. Explain which bond will trade at a higher price in the market and why?
B. What happens to the market price of each bond if the interest rates in the economy go up? Elaborate on your rationale.
C. Which bond would have a higher percentage price change if interest rates go up? Explain.
D. Substantiate your argument with numerical examples.

Reference no: EM133670502

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