Valuing an option-free bond, Financial Management

Assignment Help:

To value an option-free bond, we must determine the on-the-run yield curve for the particular issuer whose bond we have to value. This on-the-run yield curve used for valuation process is considered as the benchmark interest rates.

Let us consider the following on-the-run issue. The illustration deals with an option-free bond with four years remaining to maturity and a coupon rate of 6.5%.

Maturity

Yield to Maturity (%)

Market Price (in $)

 1 year

3.4

100

2 years

3.9

100

3 years

4.7

100

4 years

5.0

100

Each bond is trading at par value i.e., at $100, so the coupon rate is equal to the yield to maturity.

Using the bootstrapping method, the spot rates are determined as follows:

Years

Spot Rates (%)

1

3.3000

2

3.9098

3

4.8120

4

5.0586

Using spot rates, we can calculate the present value of the cash flows.

          2136_valuing opton free bond.png   = $105.374


Related Discussions:- Valuing an option-free bond

Historical inflation and stock value experience, Historical Inflation and S...

Historical Inflation and Stock Value Experience The experimental evidence denies the status of stocks as a good hedge against inflation. A study conducted by Ibbotson and Brins

Determination of spread, Determination of spread Daily interest rate = ...

Determination of spread Daily interest rate = 5.11/ 365 = 0.014% per day Variance of cash flows = 1000 × 1000 = $1000000 per day Transaction cost = $18 per transaction

Describes the gordons dividend model, Q. Describes the Gordons dividend mod...

Q. Describes the Gordons dividend model? Gordon's Model: - Gordon's model is one more theory which contends that dividend policy is relevant for the value of the firm. Alternat

Accounting entity - accounting principle, Accounting Entity - Accounting Pr...

Accounting Entity - Accounting Principle For accounting reasons it is suppose that business has separate existence and its entity is different from that of its owner(s). In si

Business proposal of a pet care shop, With the advent of globalization ther...

With the advent of globalization there had been much importance which is being given to the issues related to the general health of pets and other associated services as the people

Settlement mechanism, Settlement Mechanism: Nifty index futures and opt...

Settlement Mechanism: Nifty index futures and option contracts are cash settled. All CMs are required to open a separate bank account with NSCCL designated clearing banks. T

Identify the parties by name that have an obligation, Identify the parties ...

Identify the parties by name that have an obligation: a. Buyer/Alpha hears a rumor that the toys have not been manufactured according to the expected specifications for such t

Relationship b/w bond''s market price and yield to maturity, What is the re...

What is the relationship between a bond's market price and its promised yield to maturity?  Explain. A bond's market price reckon on its yield to maturity (YTM).  When a bond h

Interpolation applications in financial analysis, In financial analys...

In financial analysis, interpolation is used widely in: Determination of internal rate of return of a project. Finding out the yield to maturity (ytm)

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