Form a discussion on the possible determinants of market interest rates. For eac
ID: 2788080 • Letter: F
Question
Form a discussion on the possible determinants of market interest rates. For each determinant offer an explanation for when that determinant may tend to be either stronger or weaker and what is the driving force for that differential impact. For example, when would the default risk premium be stronger verse weaker and what seems to be the drivers to that stronger or weak impact?
Present and explain the U.S. Treasury yield curve. Present the three main types of yield curves with regard to shape. Illustrate with numerical examples how future inflation impacts the yield curve.
Describe the different types of debt securities. This should be a list of the various securities in each class along with relevant information that defines each security.
Develop a valuation model for a corporate bond with a par value at maturity of $1,000, a maturity of 20 years, a coupon interest rate of 7%, and a yield to maturity of 4%. The coupons are assumed to be paid semi-annually. In your development and presentation, include a time line showing the relevant cash flows along with all of the steps that allow you to generate the value (price of the bond).
Given the problem above, identify how the bond price will be expected to adjust across time as the bond approaches maturity. You should calculate the price after each 2-year period has passed – i.e., after year 2, year 4, year 6, year 8, year 10, year 12, year 14, year 16, year 18, and year 20. Graph the resulting movement in the price across time using the resulting values. Explain how this movement in the bond price across time is important for the investor.
Explanation / Answer
Answer
Maturity Value = 1000 $
YTM(kd) = 4 % per annum or 1 % semi annually
Coupan Interest Rate = 7% p.a or 1.75% semi annually
Value of the bond is value of the future cash inflows viz is $ 17.5 per semi annually as coupan plus 1000 $ at its maturity so The Present Value is
= Coupon per term*CPVF1%,80 terms + Maturity Value * PVF4%, 20th year
=17.5*54.89+1000*.456
=960.57+456.39=$1416.96
This is because the bond is yielding more than its coupan rate and the time for which it is to be invested.
As the time pass the value will decrease and at the 20th year it will become equal to Maturity value as follows
2nd Year = Coupon per term*CPVF1%,72 terms + Maturity Value * PVF4%, 18th year
=17.5*1.15+1000*.493.63=895.125+493.63=$1388.755
4th Year = Coupon per term*CPVF1%,64 terms + Maturity Value * PVF4%, 16th year
=17.5*47.10+1000*.533=$1357.25
6th Year= Coupon per term*CPVF1%,56 terms + Maturity Value * PVF4%, 14th year
=17.5*42.72+1000*..577
=$1324.60
8th Year = Coupon per term*CPVF1%,48 terms + Maturity Value * PVF4%, 12th year
=17.5*37.97+1000*.624
=$1288.47
10th Year = Coupon per term*CPVF1%,40 terms + Maturity Value * PVF4%, 10th year
=17.5*32.835+1000*.675=$1249.6125
12th Year = Coupon per term*CPVF1%,32 terms + Maturity Value * PVF4%, 8th year
=17.5*27.27+1000*.731
=477.225+731=1208.225
14th Year = Coupon per term*CPVF1%,24 terms + Maturity Value * PVF4%,6th year
=17.5*21.243+1000*.790=$1161.75
16th Year=Coupon per term*CPVF1%,16 terms + Maturity Value * PVF4%,4th year
=17.5*14.718+1000*.854
=$1111.565
18th Year=Coupon per term*CPVF1%,8 terms + Maturity Value * PVF4%,2 year
=17.5*7.652+1000*.924
=$1057.91
And Finally
20th Year = Coupon per term*CPVF1%,0 terms + Maturity Value * PVF4%,0 year
17.5*0+1000*1= $1000.
So we can conclude as the time passes the vale of the bond come closer to its maturity value and finally equal to maturity value at its life end.