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Topic 4 Expert solutions(1).pdf

Topic 4 Expert solutions(1).pdf - Expert answers Topic 4...

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Expert answers Topic 4: Interest rates, bill and bond valuation Question 1 A corporate bond is a debt instrument, used by companies to raise funds. The cash flows associated with a bond are the regular interest payments and the principal at maturity. The interest payments are referred to as the coupon payments or coupons, whilst the principal is often referred to as the face value. The interest payments are calculated by multiplying the coupon rate by the face value, and if paid semi-annually or quarterly, divided by the number of payments per year. The price of a bond will depend upon what investors are willing to pay for the cash flows, itself a function of the risk of lending to the company and the level of interest rates in the economy. The price indicates the market’s assessment of its capacity to repay, and so indicates the yield (as an average return to discount the interest and principal repayments). Corporate bonds have a long history with early accounts of bonds in the 19 th century.
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