Question

The time value of money concepts are used to compute financial instruments like corporate debt and bonds. All investments are ultimately tied to cash, how much is received, and how quickly it is received. The concepts employed here are the same valuation concepts that you will use to complete the Unit 6 assignment, Evaluation of Capital Projects.

In this discussion, examine the way cash flows are analyzed to determine prices for financial securities and how these securities relate to enterprise value. Imagine you have graduated with your MBA, and your grandmother has asked your advice on a bond that her broker has recommended. She sent you the following e-mail:

Hi there! I just met with Amanda Ritter—you know, that broker I was telling you about at dinner the other night. Anyway, Amanda says I should consider buying some bonds, but I have no idea what to do. I have some questions for you.

• What information do I need to determine the suitability of a bond?
• What type of information do I need to determine the price of the bond?
• What factors could impact the bond price, going forward?
• What else should I think about so I can make an informed choice on whether to buy the bond or not?
• Are there good resources that you can send to me? (I'd love to read them and start educating myself on bonds.)

Thanks for your help. It would be great if you could e-mail your answers and send me a list of resources by the end of the week. I'd like to prepare before meeting with Amanda again. Thanks!

Answer 1

Information for determining suitability of a bond:

While assessing the possible execution of a bond, investors need to survey certain factors. The most significant viewpoints are the bond's price, its date to maturity, its redemption features and its interest rate. Investigating these key segments permits you to decide if a bond is a fitting investment.

How to determine bond's price:

The principal thought is the price of the bond. Pricing is impacted by the yield you will get on the bond.

Bonds exchange at par, at a premium or at a discount. On the off chance that a bond is exchanging at a premium to its face value, at that point it as a rule implies the common interest rates are lower than the rate the bond is paying. Since you are qualified for a higher interest rate than you could get from comparable instruments, hence, the bond exchanges at a higher sum than its face value,   

If the price is lower than its face value, a bond is exchanging at a discount This demonstrates the bond is paying a lower interest rate than the current interest rate in the market. There is less interest for a bond with a lower interest rate, since you can get a higher interest rate effectively by putting resources into other fixed income securities.

A bond with a price at par is exchanging at its face value—the sum at which the backer will reclaim the bond at maturity, it is called the par value.

Factors that impact bond's price:

The most powerful factors that influence a bond's price are the fluctuating interest rates, the bond's rating and the yield. Basically, a bond's yield is the current value of its cash flows, equivalent to the chief sum in addition to all the rest of the coupons.