You consider purchasing bonds today. There are three future time periods, t = 1, 2, 3, where bonds can have payoffs. Consider the following 4 bonds: a) One amortizing bond paying $40 each period trading at a price of $104.95. b) One amortizing bond paying less in early periods and more in later periods. The bond pays $40 in period 1, $30 in period 2, and $20 in period 3. This bond is trading at a price of $80.61. c) One coupon bond with a 11% coupon rate trading at a price of $96.08. d) One zero coupon, which currently trades at a price of $77.22. Suppose you can take long or short positions in any bond, and also lend or borrow money. Is it possible to construct an arbitrage trade where you pay nothing upfront, and get a certain payoff in period 1? If so, describe how you would do this trade.
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:
You consider purchasing bonds today. There are three future time periods, t = 1, 2, 3, where
bonds can have payoffs. Consider the following 4 bonds:
a) One amortizing bond paying $40 each period trading at a price of $104.95.
b) One amortizing bond paying less in early periods and more in later periods. The bond pays $40 in
period 1, $30 in period 2, and $20 in period 3. This bond is trading at a price of $80.61.
c) One coupon bond with a 11% coupon rate trading at a price of $96.08.
d) One zero coupon, which currently trades at a price of $77.22.
Suppose you can take long or short positions in any bond, and also lend or borrow money. Is it possible
to construct an arbitrage trade where you pay nothing upfront, and get a certain payoff in period 1? If so,
describe how you would do this trade.
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