Suppose that the market interest rate rises overnight from 3.5% to 8%. Calculate the present values of the 5.5%, 3-year bond and of the 5.5%, 30-year bond both before and after this change in interest rates. Which bond price fluctuates more to interest rate change? Why?

Suppose that the market interest rate rises overnight from 3.5% to 8%. Calculate the present values of the 5.5%, 3-year bond and of the 5.5%, 30-year bond both before and after this change in interest rates. Which bond price fluctuates more to interest rate change? Why?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 3Q: The rate of return on a bond held to its maturity date is called the bonds yield to maturity. If...

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Concept explainers

Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.

Question

Definition Definition Calculates the present value of a bond's expected future periodic coupon payments. Bond valuation determines the theoretical fair value of a particular bond and helps investors estimate what rate of return they could expect. The bond's theoretical fair value is computed by discounting the future cash flows or coupon payments by an applicable discount rate.

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