Example of relationship between bond price and time, Financial Management

Assignment Help:

Illustration 

 

 

Discount bond (5 yr. bond with 10% coupon) (expected rate yield at 12%)

Premium bond (expected yield at 7.8%)

5

 92.6

109.0

4

 93.8

107.4

3

 95.1

105.8

2

 96.5

104.0

1

 98.2

102.0

0

100.0

100.0

Reasons for price changes of a bond:

  1. Change in the yield requirement of the issuer due to changes in the quality of credit of the issuer.

  2. Change in the price as the bond approaches maturity in case of premium or discount bond.

  3. Change in the price because of change in the yields of comparable bonds/securities.

While computing the bond pricing, the following assumptions are made:

  • Cash flows are known.

  • Coupon payment annually/semi-annually is made at exact period.

  • Required yield can be estimated.

  • One rate is used to discount all cash flows, i.e., with required yield rate.

The following cash factors are to be considered:

  • For callable bonds, cash flows cannot be certain. The investment decisions of the issuer depend on interest rate movements and other factors.

  • It is not possible to determine the appropriate yields and it need not be a single rate for all the future cash flows.


Related Discussions:- Example of relationship between bond price and time

Advantage of mutual funds, Advantage of mutual funds Mutual Funds are a...

Advantage of mutual funds Mutual Funds are advantageous to individual investors in relation to their direct involvement in investment portfolio activity covering the following

Increased common stock cash dividend signal to stock holder, Do you believe...

Do you believe an increased common stock cash dividend can send a signal to the common stockholders?  If so, what signal might it send? An enhance in cash dividends is often se

Multiperiod compounding, where you deposit 1000dollars at the end of each y...

where you deposit 1000dollars at the end of each year for 4 years, what will be the amount of deposits at the end of each year if it is compounded at 12% semi-annually?

Financial accounting, Financial accounting: Financial accounting attemp...

Financial accounting: Financial accounting attempts to establish the value of a particular organisation at a specific point in time, and its earnings over a specified period of

Price volatility characteristics of option-free bonds, As we know tha...

As we know that price of option-free bond changes in the opposite direction from a change in bond's required yield, Table 1 and figure 1 explains this feature of

Determine the purchasing in leaminger plc, b) Each $1 of outlay prior to 3...

b) Each $1 of outlay prior to 31 December 2003 would mean a loss in NPV on the alternative project of $0·20. There is so an opportunity cost of using funds in 2002. Purchasing

Types of treasury bills, Types of Treasury Bills Treasury bills are iss...

Types of Treasury Bills Treasury bills are issued at various maturities, generally up to one year. Thus, they are useful in managing short-term liquidity. At present, the GOI (

Dividend yield method, Dividend yield method As per this method, the co...

Dividend yield method As per this method, the cost of Equity capital is the discount rate that equates the present value of expected future dividends per share with the net pro

What is qualities of pay back method, Q. What is Qualities of Pay Back Meth...

Q. What is Qualities of Pay Back Method? Qualities of Pay Back Method:- (i) Simple: - The most important merit of this method is that it is simple to understand and easy to

Determine the financial requirements of the business, Q. Determine the fina...

Q. Determine the financial requirements of the business ? Decisive the Financial Needs: - The initial task of the financial management is to estimate and determine the financia

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd