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

Calculate the confidence interval of returns, Following are return expectat...

Following are return expectations on the S&P 500 index for the upcoming year with the corresponding probabilities: Expectation                                   Return

What is a financial ratio, What is a financial ratio? A financial rati...

What is a financial ratio? A financial ratio is a number that convey the value of one financial variable relative to another.  Put more easily, a financial ratio is the final

Explain that the u.s. imports more than it exports, Comment on the subseque...

Comment on the subsequent statement: “Since the U.S. imports more than it exports, it is essential for the U.S. to import capital from foreign countries to finance its current acco

Financial managemant, Task - 01 During its financial year ended 30 June 2...

Task - 01 During its financial year ended 30 June 20x7 Beavers Ltd, an engineering company, has worked on several contracts. Information relating to one of them is given below.

Futures contract, Futures Contract It is an obligation to purchase or s...

Futures Contract It is an obligation to purchase or sell an asset at an agreed-upon price on an exact future date. The buyer commits himself or herself to buy the asset, and th

Need help, #queThe opening balance of one of the 31-day billing cycles for ...

#queThe opening balance of one of the 31-day billing cycles for Lorenzo''s credit card was $4100, but after 15 days Lorenzo made a payment of $2300 to decrease his balance, and it

Case let 2, how would you judge the potential profit of Bajaj Electronics o...

how would you judge the potential profit of Bajaj Electronics on the first year of sales to booth plastice and give your views to to increase the profit

Baumol model, A campany estimate a cash requirment of 900000 the opportunit...

A campany estimate a cash requirment of 900000 the opportunity interst eate is 9% per anual the transaction cost for borrowing or withdrawing fund is 264.5

Define that an option is in-, What is meant by the terms that an option is ...

What is meant by the terms that an option is in-, at-, or out-of-the-money? Answer:  A call or put option with S t > E (E > S t ) is considered to as trading in-the-money.  If

Defien contractual savings institutions, Contractual savings institutions ...

Contractual savings institutions Contractual savings institutions obtain funds at periodic intervals on a contractual basis. The industry is classified into two main groups ins

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