Interest Rates and the Value of Bonds

Chapter Six focuses on interest rates and the value of bonds. The real rate of interest represents the most basic cost of money. If you were to compare the rest rate of interest and nominal rate of interest on a risk free asset is Nominal rate of interest is the actual rate of interest charged by provider of funds and paid by the demander. Structure of interest rates is the amount between return on bonds with like levels of risk and the maturity. this term is related to  graphical representation of the structure of interest called the yield curve. For each class of risk securities that yield curve reflects different interest rates, one being when interest are long term the slope will face upward, when the slope faces downward long term rates are below interest rates. If the rates do not vary at different maturities the slope will be flat, and finally a normal yield will show that long term interest rates are usually higher than short term investment rates. The difference between standard debt provisions and restrictive covenants are one focuses on record keeping and the other places financial restrictions on the borrower. Instant reimbursement of the debt can be demanded by the bondholder to the borrower if either of these provisions or covenants are dishonored.  The bond of cost financing and cost of short term borrowing are related because both are used to fulfill some form of financial obligation while repayment is considered. The bonds maturity, size of the offering, the issuers risk, and the basic cost of money are all factors that affect cost. The conversion feature is used to convert bonds into common stock.  business bonds have a call feature that gives the issuer the opportunity repurchase bonds at a specifics call price before the bond has matured. Stock purchase warrants are tools that give the holders the right to purchase a specific number of shares of the issuers common stock at a price over a period of time. The current yield for a bond is the cash return on a bond for the year. bonds prices are quoted by the par value percentage.  Bonds are rated by the returns they yield. The difference between Eurobonds and foreign bonds is Eurobonds are issued worldwide and sold to countries with different currencies. Where as foreign bonds are issued by foreign governments and corporations and sold in that specific investors market and home instead of internationally. It is important for financial managers to understand the valuation process because this process links risk and return in order to understand the value of an asset. The three key inputs to the valuation process are cash flows, timing, and the risk required  return. The basic procedure used to value a bond that pays annual interest is determine its current value annual interest the number of years it takes to reach maturity and par value the dame goes for semiannual interest except you find the future value instead of current value. The relationship between the required return and the coupon interest rate is the value it is being sold for,When a bond sells at a value less than its par value it sells at a discount. When a bond sells at a value that is greater than its par value it sells at a premium. When the required rate equaled the coupon interest rate the bond value is equal its l, 000 par values. The bond value will approach its par value as the bond grows closer to its maturity date as time passes by this is the behavior that occurs over time. Shorter bonds would be more acceptable from a risk adverse investors perspective because The shorter the amount of time until a bond’s maturity, the less receptive it is in the market value to a given change in the required return.  Short maturities have less interest rate risk than long maturities when all other features are the same.