Question

1.How do we value an asset?

2.How are bond prices and interest rates related? Use the terms 'discount', 'par', and 'premium' in your explanation.

3.What is Bond Duration and what affects it?

Answer 1

1. Asset Valuation

The principle purpose of asset valuation is to document the financial value of the road infrastructure assets owned by an organization and included on the organization’s financial balance sheet. Placing a monetary value on road assets emphasizes their importance and the potential cost to replace them and to return them to new condition. This cost is reported through the depreciation of the road asset, which represents the consumption of the asset in delivering services to road users and other stakeholders. It is essential that asset valuation for road infrastructure assets comply with the financial reporting requirements relevant to that particular country.

Monitoring how the asset value changes with time can indicate if the investment required to maintain the appropriate value of the asset is being provided. As such, monitoring can provide compelling arguments for investing in the preservation of the asset base to senior decision makers in the organization.

Methods of Asset Valuation

Valuation of fixed assets can be done using various methods, which include the following:

1. Cost Method

The cost method is the easiest way of asset valuation. It is done by basing the value on the price for which the asset was bought.

2. Market Value Method

The market value method bases the value of the asset on its market price or its projected price when sold in the open market. In the absence of similar assets in the open market, the replacement value method or the net realizable value method is used.

3. Base Stock Method

The base stock method requires a company to keep a certain level of stocks whose value is assessed based on the value of a base stock.

4. Standard Cost Method

The standard cost method uses expected costs instead of actual costs, often based on the company’s past experience. The costs are obtained by recording differences between expected and actual costs.

2.   Bond prices and interest rates are inversely related, with increases in interest rates causing a decline in bond prices. Learn why interest rates affect the price of bonds, and how you can take a position on the bond market.

What happens when interest rates go up?

When interest rates rise, the market value of bonds falls.

If you have a bond with a coupon of 3% and the cash rate increases from 3% to 4%, for example, the coupon rate on the bond will now seem less attractive to investors so they’ll be willing to pay less for it.

The market price of long term bonds may be more volatile than shorter term bonds, because changes to the relative rate of return would have a bigger impact over a longer period of time.

A lower price, however, would improve the current yield for perspective investors because if they can buy the bond for a discount, their overall return will be higher.

• Floating rate bondholders stand to benefit from an increase in interest rates because the coupon rises or falls in tandem with interest rates.

What happens when interest rates go down?

If interest rates decline, bond prices will rise. That’s because more people will want to buy bonds that are already on the market because the coupon rate will be higher than on similar bonds about to be issued, which will be influenced by current interest rates.

If you have a bond with a coupon rate of 3% and the cash rate falls from 3% to 2%, for example, then you and other investors might wish to hold onto the bond as the rate of interest has improved on a relative basis.

A rise in demand will push the market price of the bonds higher and bondholders might be able to sell their bonds for a price higher than their face value of $100.

• Floating rate bondholders would lose out from a fall in interest rates because the coupon rises or falls in tandem with interest rates.

A bond selling at a premium is one that costs more than its face value, while a discount bond is one selling below face value. Usually, bonds with higher than current interest rates sell a a premium, while those with interest rates below prevailing rates sell at a discount.

3.

What is bond duration? Bond duration is a way of measuring how much bond prices are likely to change if and when interest rates move. In more technical terms, bond duration is measurement of interest rate risk. Understanding bond duration can help investors determine how bonds fit in to a broader investment portfolio.