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Bonds mod 2 case - Essay Example

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Summary to essay on topic "Bonds mod 2 case"
According to literature, the yield curve is generally upward sloping, higher the maturity, greater will be the yield. However, in some of the cases, abnormal behavior is also expected. For example, in cases when the long term yields are less than the short term yields, we get an inverted yield curve…
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1.125381

Bond 3 has the highest percentage change and bond 1 has the lowest percentage change.
Table 3: Price for the four bonds (after increase of 0.5% in yield to maturity) and the percentage change from base case
Bond number
Maturity (years)
Coupon ($)
Price ($)
Yield to maturity (%)
Change from original (%)
1
2
50
974.
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1183
6.42%
-1.8026
2
3
45
958.3473
6.06%
-1.34675
3
4
60
994.5793
6.16%
-1.72141
4
6
55
958.6585
6.35%
-3.77975

Bond 4 has the highest percentage change and bond 2 has the lowest percentage change.
From the results, it can be inferred that under normal circumstances and for normal bonds, the yield increases as the maturity period increases, so, if an investor is holding the bond for longer time, then, he/she will have greater yield as compared to an investor who holds the bond for shorter period.
There are various corporate bonds, wherein, the companies raise funds by issuing bonds and make the interest payments to the bond holders. However, in case of corporate bonds, there is a probability of default, if the company defaults, the bond-holder will not be able to generate returns on the bonds. Any investor who wishes to invest in bonds should consider the probability of default. All the above calculations are done on the basis of the assumption that there is no risk of default.
Dividend Growth Model
The three factors which affect the stock prices in case of dividend growth model are as follows.
The current dividend
Growth of the dividend
Required rate of return
The formula which relates the above mentioned parameters with the value of the stock is as follows. (Dividend Growth Model)
Value = (Current Dividend * (1 + Dividend Growth)) / (Required Return - Dividend Growth)
Some of the inferences from this formula are as follows.
The value of...
There are various corporate bonds, wherein, the companies raise funds by issuing bonds and make the interest payments to the bond holders. However, in case of corporate bonds, there is a probability of default, if the company defaults, the bond-holder will not be able to generate returns on the bonds. Any investor who wishes to invest in bonds should consider the probability of default. All the above calculations are done on the basis of the assumption that there is no risk of default.
The value of stock increases with dividend growth if the dividend growth is less than 50% and it decreases of dividend growth is more than 50%. (Calculated by differentiating the equation with respect to dividend growth) ...Download file "Bonds mod 2 case" to see next pagesRead More
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