Fixed Income Analysis

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Joined: Wed Jun 25, 2014 8:09 am

Fixed Income Analysis

Postby alwaysenjoy.indu » Sat Jun 28, 2014 2:41 am

Problem : Calculate the value of a bond, that would pay you $50 every year, starting from a year from now, for the next 3 years and would pay you a sum of $1000 at the end of 3 years. The appropriate discounting factor is 10%

My Understanding :

In Bond market its contract between the issuer/borrower and lender at pre determined coupon payment having n maturity period for x principal amount...

So generally coupon payment is something its kind of interest which the investor receives on periodical basis and in the given example it says 10 % discount rate - may I know wht is this addidtional 10 % discount rate ?

Why will the investor received two returns ( $50 and 10% )

Can some one please clarify this at the earliest and also my previous questions

Finance Junkie
Posts: 709
Joined: Wed Apr 09, 2014 6:28 am

Fixed Income Analysis

Postby edupristine » Sat Jun 28, 2014 11:43 am

Nope, Here $50 is coupon payment, 10% is discounting factor that will be used in PV calculation,
At the time of issuance company issues a bond at some present value. For example If the bond is issued at 10% coupon rate but you are getting 11% in the market( without covering any extra risk).
In such case you will not buy this bond If your Cash flows is not discounted with (11%) because as per the bond agreement you will get only 10% as a coupon.

Note:- PV<FV( If coupon is lesser than discount rate).
PV>FV(If coupon is greater than discount rate).

In your question lender is only getting $50, 10% is only discount rate.

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