a) You hold a two-period bond that pays a coupon c at the end of each period. The interest rate is expected to be i for each of these periods. What is the price of the bond today? b) The interest rate changes to i 0 in the second period. Evaluate the rates of return when you sell the bond after one period in the case of the change being i) anticipated ii) unanticipated
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:
a) You hold a two-period bond that pays a coupon c at the end of each period. The interest rate is expected to be i for each of these periods. What is the price of the bond today?
b) The interest rate changes to i 0 in the second period. Evaluate the
i) anticipated
ii) unanticipated
Step by step
Solved in 7 steps
