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The following bond prices were recorded on June 1, 2008. Assume each bond pays interest annually on

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The following bond prices were recorded on June 1, 2008. Assume each bond pays interest annually on June 1.

Bond                                     Price (S)
Canada 3.55 of 2013.............103.68
Canada 4.255 of 2014.........1086.85


a. What is the yield to maturity on each bond?

b. What is the duration of each bond?

c. Which bond has the greater interest rate risk?

Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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First we will find the YTM of each bond YTM is the annual return of keeping the bond It is the discount rate that makes the market value of the bond e...View the full answer


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Prashant Sharma
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Fundamentals Of Corporate Finance

Fundamentals Of Corporate Finance

ISBN: 9781259087585

6th Canadian Edition

Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan, Gordon Roberts

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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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