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3 pages/β‰ˆ825 words
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APA
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Accounting, Finance, SPSS
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Essay
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English (U.S.)
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Stocks and Bonds: Stock Valuation (Paper #2)

Essay Instructions:

Please only original writing.
The company for the assignment is Southwestern Airlines (Module 1 SLP assignment is attached)
Part 1 of the assignment is to answer the questions and show the work. Whenever appropriate, please use Excel to show supporting computations in an appendix, present financial information in tables, and use the data computed to answer follow-up questions (assignment instructions doc attached)
Part 2 of the assignment is to write a two page essay comparing reinvestment risk and interest rate risk and how an investor can protect his or her portfolio from those risks. Please be sure to discuss duration in the paper.(assignment instructions doc attached)
MOD 1 SLP Assignment: 
Stocks and Bonds
Bond Valuation
This assignment contains two parts: Part I and Part II.
Part I
Answer these questions and show your work:
Assume that the company that you selected for the Module 1 SLP has a bond outstanding that matures in 20 years and has a coupon rate of 6.5%. The par value of the bond is $1,000. 
If the yield to maturity is 8% and the bond pays interest on an annual basis, what’s the current price of the bond? Is the bond selling for a premium or discount? How can you tell? 
If the yield to maturity is 8% but the bond pays interest on a semi-annual basis instead of an annual basis, what’s the current price of the bond? Is it different from the value when using annual compounding? Explain. 
Now, assume that the economy enters into a recession and interest rates fall. The bond’s yield to maturity is now 5%. What’s the bond’s new price? How does the price compare with your answer in part a? Why did the bond’s value change? 
A bond matures in ten years and is currently selling for $1,125. The bond pay interest annually, has a par value of $1,000, and a yield to maturity of 10.75%. What’s the bond’s current yield? 
Part II:
Write a 2-page essay comparing reinvestment risk and interest rate risk and how an investor can protect his or her portfolio from those risks. Please be sure to discuss duration in your paper.
SLP Assignment Expectations
You are expected to: 
Describe the purpose of the report and provide a conclusion. An introduction and a conclusion are important because many busy individuals in the business environment may only read the first and the last paragraph. If those paragraphs are not interesting, they never read the body of the paper.
Answer the SLP Assignment question(s) clearly and provide necessary details.
Write clearly and correctly—that is, no poor sentence structure, no spelling and grammar mistakes, and no run-on sentences.
Provide citations to support your argument and references on a separate page. (All the sources that you listed in the references section must be cited in the paper.) Use APA format to provide citations and references.
Type and double-space the paper
Whenever appropriate, please use Excel to show supporting computations in an appendix, present financial information in tables, and use the data computed to answer follow-up questions. In finance, in addition to being able to write well, it’s important to present information in a professional manner and to analyze financial information. This is part of the assignment expectations and will be considered for grading purposes

Essay Sample Content Preview:

Stocks and Bonds: Stock Valuation
Name:
Subject:
Date of Submission:
Stocks and Bonds: Stock Valuation
It is crucial for investors to understand bond calculations and the risks associated with bonds. It follows that this paper uses numerical examples to explain the effect of different variations on the current price of a bond. It also compares interest rate risks and reinvestment risks before discussing strategies for controlling such risks.
Part I
Assume that Southwestern Airlines have a bond outstanding that has a coupon rate of 6.5 and matures in 20 years. Further, assume that the bond issued by the organization has a yield to maturity of 8 percent. In order to find the current price of the bond, bond calculations were done in Microsoft Excel. The results of the calculation are shown in table 1 of the appendix below. Given the conditions in above, the current price of the bond is 803.63705. It follows that the bond is selling at a discount because the coupon rate is 6 % while the yield to maturity is 8 percent. This owes to the reality that Ehrhardt and Brigham (2010) argue that a bond is said to be selling at a discount if the yield to maturity exceeds the coupon rate.
Considering the same conditions in paragraph one, excluding the fact that interest rates are paid semi-annually, the price of the bond becomes 802.0723. Clearly, the current price of the bond is lower because an increase in the number of annual results to an increase in the total interest paid to the bondholder. Therefore, the current price of the bond reduces because the yield to maturity does not change. It is also notable that the current price of the bond becomes 1124.6221 if the yield to maturity reduces to five percent. As evidence, Choudhry (2010) argues that a decrease in the interests rates results increases the bond prices.
Also, assume that a bond maturing in ten years and is currently selling at $ 1125 has a par value of $ 1000. If the yield to maturity of the bond is 10.75, the current yield of the bond becomes 8.82 percent. The calculations were done in excel as shown in table 2 of the appendix below.
Part II
The term reinvestment risk could be elucidated a risk arising from the reality that interests earned from bonds may not be reinvested to earn returns similar to the funds that generated the interests (Brigham and Houston, 2013). It follows that such a risk is likely to occur when the market interest rates decline. Further, the degree and magnitude of a reinvestment risk is affected by two main factors. These factors include the maturity of the bond and the interest of the bond. For instance, bonds with longer times to maturity experience higher chances of facing a market with declining interest rates than bonds with shorter terms to maturity. It is also critical that bonds with higher interest rates face higher chances of experiencing fluctuating interest rates than bonds with short terms to maturity (Ehrhardt and Brigham, 2010). This implies that zero coupon bonds are the only types of bonds with no reinvestment risks because they do not have coupon payments.
In comparison, the term interest rate risk could be elucidated as the risk faced due to price changes in the value of a bond because of absolute changes in...
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