chapter 8 npte - Omar M. Al Nasser, Ph.D., MBA. Visiting...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Omar M. Al Nasser, Ph.D., MBA. Visiting Assistant Professor of Finance School of Business Administration University of Houston-Victoria Email: alnassero@uhv.edu Chapter 8 Bond Valuation and Risk Outline Bond Valuation Process Impact of the Discount Rate on Bond Valuation Impact of the Timing of Payments on Bond Valuation Valuation of Bonds with Semiannual Payments Relationships between Coupon Rate, Required Return, and Bond Price Implications for Financial Institutions Explaining Bond Price Movements Factors That Affect the Risk-free Rate Factors That Affect the Credit (Default) Risk Premium Summary of Factors Affecting Bond Prices Bond Market Efficiency Sensitivity of Bond Prices to Interest Rate Movements Bond Price Elasticity Duration Bond Investment Strategies Used by Investors Matching Strategy Laddered Strategy Barbell Strategy Interest Rate Strategy Return and Risk of International Bonds Influence of Foreign Interest Rate Movements Influence of Credit Risk Influence of Exchange Rate Fluctuations International Bond Diversification
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
POINT/COUNTER-POINT: Does Governance of Firms Affect the Prices of Their Bonds? POINT: No. Bond prices are primarily determined by interest rate movements and therefore are not affected by the governance of the firms that issued bonds. COUNTER-POINT: Yes. Bond prices reflect the risk of default. Firms that impose more effective governance may be able to reduce their default risk and therefore increase the price of the bond. WHO IS CORRECT? Use the Internet to learn more about this issue. Offer your own opinion on this issue. ANSWER: A bond’s price is based on the investor’s required rate of return, and investors may accept a lower return on bonds issued by firms that are subject to a higher degree of governance. Thus, governance can affect the price of the firm’s bonds. Questions 1. Bond Investment Decision. Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain. ANSWER: Students that expect interest rates to rise should expect bond prices to decline in the future, and therefore not recommend that investors purchase bonds today. Conversely, students that expect interest rates to decrease should expect bond prices to rise in the future, and therefore recommend that investors purchase bonds. 2. How Interest Rates Affect Bond Prices. Explain the impact of a decline in interest rates on: a. An investor’s required rate of return. ANSWER: An investor’s required rate of return should decrease. b. The present value of existing bonds. ANSWER: The present value of existing bonds should increase. c. The prices of existing bonds. ANSWER: The prices of existing bonds should increase. 3. Relevance of Bond Price Movements.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/21/2011 for the course FINANCE 3321 taught by Professor Jianjundu during the Fall '11 term at University of Houston-Victoria.

Page1 / 16

chapter 8 npte - Omar M. Al Nasser, Ph.D., MBA. Visiting...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online