Valuing Bonds Essay Example | Topics and Well Written Essays - 250 words

Valuing Bonds - Essay Example The call provision feature allows bond issuers to pay off the remaining debt early before the maturity date. The role of the borrower is to make a lump sum payment derived from a formula based on the net present value (NPV) of future coupon payments that  will not be paid because of the call. The call provision right is usually exercised at times of low interest rates and it allows the bond holder to retire what is currently a high interest debt and reissue it at a lower interest rate. Call provisions limit a bonds potential price appreciation because when interest rates fall, the price of a callable bond will not go any higher than its call price. Thus, the true yield of a callable bond at any given price is usually lower than its yield to maturity. A discount bond is a bond issued at a price lower than its par value is a bond currently trading at less than its par value in the secondary market. An example is a $4,000,000, 9%, 5-year bond with par value of $1000 issued at $970. A premium bond is a bond issued at a price higher than its par value is a bond currently trading at more than its par value in the secondary market. An example is a $4,000,000, 9%, 5-year bond with par value of $100 issued at $105. For a 5% bond, interest is paid is calculated at the interest rate on the par value of bond and is paid periodically (annually or semi-annually) while for a zero coupon bond, no periodic interest payments are made. When the bond reaches maturity, its investor receives its par (or face) value. "Calculate the price of a $1,000 (FV) zero coupon bond that matures in 20 years if the market interest rate is 6.5 percent." (Cornett, Adair, and Nofsinger, 2012, p. 147). Assume semi-annual compounding. 4. "Compute the price of a $1,000 (FV) 4.5 percent coupon bond with 15 years left to maturity and a market interest rate of 6.8 percent." (Cornett, Adair, and Nofsinger, 2012, p. 148). Assume interest payments are paid semi-annually,