Growth Models 7D: Cash Flows Associated With A Bond (Essay Sample)
Provide a half page single spaced response to each of the following questions. Cite two sources (APA) for each question and indicate for which question the source was used. No Title Page required
oWhat are the cash flows associated with a bond? What are important bond features and why do values and yields fluctuate?
o Explain the difference between a perpetuity (zero growth model), constant growth model and a non-constant growth model in valuing stocks.
Growth Models 7D
Cash flows associated with a bond
Bonds are a corporate security that signifies debt of the corporation. They can be easily valued by calculating the present value of the bonds future interest payments and the bond value upon maturity. The cash flows linked with bonds are the coupon payments on the bond every coupon period and the face value or maturity value of the bond. The coupon payments are the periodic payments on a bond that are paid semi yearly. Conversely, face value is the amount to be paid back at maturity. The market value of a bond is the present value of the anticipated cash flow streams. Moreover, the coupon payments and principal repayment are discounted at the bondholders projected return (Garrison, 2013).
Important bond features
The essential features of a bond include maturity, par value, coupon rate, issue price, and currency denomination. Maturity refers to the period at which the bond matures and the bondholder gets the last sum of principal and interest. Par value is the sum over which the issuer pays interest and that has to be paid back at the end. Coupon is the interest rate that the issuer pays to the bondholders each year, whereas the currency denomination shows what currency the interest and principal will be paid in. The issue price refers to the cost that investors purchase the bonds when they are issued at the first time (New York University Stern, 2015).
Values and yields fluctuation
The bond’s price and its yield are inversely correlated since when the price of a bond goes up its yields goes down and when the price of a bond goes down its yield goes up. When an investor purchases a bond at par, yield is equivalent to the interest rate. However, when the price changes it makes the yield to fluctuate. On the other hand, the bond’s in...
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