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Finance

Value of a Bond and Asset

Value of a Bond and Asset

Determining the Value of an Asset Based on Expected Future Cash Flows

The value of an asset is determined using the discounted cash flow valuation method when the value is based on the asset’s anticipated future cash flows. The method calculates the asset’s net present value of all cash inflows. An appropriate discount rate is used to perform the calculations. The higher the discount rate, the lower the current value of cash flows and, thus, the lower the asset value as calculated (Kruschwitz & Löffler, 2020). Further, risk factors and potential volatility in cash flows affect the discount rate used in calculations. Therefore, assets with lower discount rates will have higher values, while those with higher ones will have lower ones.

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Determining the Value of a Bond

The following formula is used to determine the value of a bond:

Bond price formula= C*[1-(1+r)^-n]/r+F/(1+r)^n

The value of the bond of a 10-year, $1,000 par value bond with a 10% annual coupon when its required rate of return is 10% will be given by:

  • YTM=10
  • CR=10%
  • PMT=$100
  • PMT=$100
  • FV=$1,000
  • GR=10%

Reference

Kruschwitz, L., & Löffler, A. (2020). Stochastic Discounted Cash Flow. Springer International Publishing.

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Question 

This assignment aims to explain core concepts related to fixed-income securities.

Read Chapter 5, Mini Case in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions c through d.

Value of a Bond and Asset

Value of a Bond and Asset

Create a 2-3 slide PowerPoint presentation in which you summarize your answers from the mini case. Be sure to include graphs, charts, and trends as appropriate.

Present the PowerPoint to the class, as directed by your instructor.

In addition, submit your answers to the mini case and your PowerPoint to the instructor.

While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide in the Student Success Center.

This assignment uses a rubric. Please review the rubric before beginning the assignment to familiarize yourself with the expectations for successful completion.

Mini Case

Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Insurance Company and co-directors of the company’s pension fund management division. An important new client, the North-Western Municipal Alliance, has requested that Mutual of Seattle present an investment seminar to the mayors of the represented cities. Strother and Tibbs, who will make the presentation, have asked you to help them by answering the following questions.

c- How does one determine the value of any asset based on expected future cash flows?

d- How is the value of a bond determined? What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon if its required rate of return is 10%?