You are a personal financial planner working with a married couple in their early 40s who have
Question:
You are a personal financial planner working with a married couple in their early 40s who have decided to invest $100,000 in corporate bonds. You have found two bonds that you think will interest your clients. One is a zero coupon bond issued by PepsiCo with an effective interest rate of 9 percent and a maturity date of 2031. It is callable at par. The other is a Walt Disney bond that matures in 2093. It has an effective interest rate of 9.5 percent and is callable at 102 percent of par. Which of the two bonds is less likely to be called if interest rates fall over the next few years?
Step by Step Answer:
If interest rates were to fall companies might decide to call their ...View the full answer
Financial Accounting
ISBN: 9781264229734
11th Edition
Authors: Robert Libby, Patricia Libby, Frank Hodge
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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