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Bond Valuation and Yield on Bond

 

 

Learning Objective:

To understand the application of bond valuation for investment decisions.

 

Learning Outcome:

After attempting this GDB, the students would be able to understand the application of bond valuation for investment decisions.

 

The Case:

 

Suppose, you are working as an investment consultant in a consultancy firm and most of your clients are habitual investors, who are maintaining their own portfolios comprising of various combinations of stocks and bonds.

Mr. Zahid, a habitual investor comes to you for consulting about adding one more potential investing option to his existing portfolio. Currently, as per your analysis, there are two bonds available in the market with the following data:

 

 

Bond A

Bond B

Maturity

3 years

8 years

Coupon payment

10% Annual

10% Semiannual

Yield

6.23%

9.8%

 

*Note: Interest rate fluctuations are high in the market

 

Required:

  • Suggest Mr. Zahid, who is interested to add only one bond to his portfolio about the suitable bond for his portfolio.
  • Support your choice by elaborating the reason on which the suggested bond is considered as a preferred option.

 

Views: 2998

Replies to This Discussion

salam to all

kia ye solution sahi ha

i think  bond A is better because short term period is batter then the lone term. long term period have more risk and there   

are more change interest rate and inflation rate 

good luck -----------

no sir, bond B sahi answer hai

the suitable bond B for his portfolio because the long term bonds are greater because the long term bond prices Fluctuate more in interest rate and the inflation rate.

are you agree with me.........????

No. because 

When
investor buy a long term bond he is locked in investment for long term period there are more chances of
fluctuation in interest rate and the inflation rate.
So, the impact of interest rate changes on Long Term bonds is greater. Long Term Bond Prices
fluctuate more because their Coupon Rates are fixed (or locked) for a long time even though Market
Interest Rates are fluctuating daily; therefore the price of Long Bonds has to constantly keep adjusting.
Price of the long term bond fluctuates more as compared to the short term bond. Because, you
have a long term bond with fix coupon rate but the market interest rate is fluctuating in between the
years

bond b is correct i think beacuse long term bonds have more chances of fluctuation
but in other way the chances of risk is less in bond A so ???//// exctlyy kia hoga

Exactly risk is less in bond A

now what should wo do.........

secondly yeild of born 

purchase a higher grade, lower yield bond, you are exposed to less default risk,
finally kon c hogi ab confuse

the higher yield bond will give you a higher return, in the form of coupon payments, but the default risk is higher..........

as mn yeh baat gor karny wali hay k................

Coupon payment

10% Annual

10% Semiannual

bond A ki annual hay aur bond B ki semi annual hy to jo semiannual hy aski value asko chance zada mil rahy hn aski values zada na ho gi kia????

bond B better hua na...............koi to share kary views

Definitely bond b will give you higher return but most of today's investors invest their money where risk is lower. But risk lover will go for bond B.

But it is depend on investor. It is totally confusing. If the investor is risk averse then Bond A should be suggest otherwise B.

It is also point to note that interest rate fluctuations are high in market.

 

dua bond b long term mein arah toh long term mein risk k chances zydah nhy hoty hain kia 
bond A short term hai toh us hisab say risk or fluctuation b kaam hun ????????

 saman rafiq yes exactly risk bond A mn hi less hn

aska matlab hy interesr, inflation zada ho to benifit nahin hy

jahan par risk kam hoga wo better hoga mn bhi asi confusion mn ho.........

bas Agreed A is better 

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