Relationship Between Interest Rates And Bond Prices

Running head: VALUATION OF BONDS _FUNDAMENTALS OF FINANCE
Valuation of Bonds _Fundamentals of Finance
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1VALUATION OF BONDS _FUNDAMENTALS OF FINANCE
Table of Contents
1. Explaining impact of call provision for bond issuers, while detecting why bond issuers
exercise a call provision:............................................................................................................2
2. Defining a discount bond and a premium bond:....................................................................2
3. Describing the relationship between interest rates and bond prices:.....................................3
4. Describing the differences between a coupon bond and a zero coupon bond:......................3
9. Price of zero-coupon bond:....................................................................................................4
10. Price of coupon bond:..........................................................................................................4
11. Calculating the yield to maturity:.........................................................................................4
References and Bibliography:....................................................................................................5

2VALUATION OF BONDS _FUNDAMENTALS OF FINANCE
1. Explaining impact of call provision for bond issuers, while detecting why bond issuers
exercise a call provision:
Call provision mainly provide bond issuers with right to redeem a bond before its
maturity. This call provision mechanism mainly supports the issuer in time of lower interest
rates, which might help them to buy back the existing bonds and issue new bonds at lower
interest rates. This method would allow them to save money and improve the debt
combination in their balance sheet, where lower interest payments would improve the level of
profits for the organisation and vice versa. Furthermore, the call provision directly enables
the bond issuer to adequately minimize the overall rate of interest by buying back the bonds,
while making certain premium payments to the investors.
There are certain key takeaways from the call provision that needs to be maintained
by organization issuing bonds.
 Call provisions directly allow the organization a provision on the overall other fixed
income instrument and bonds purchase, where it could be retired before the maturity date.
 The call provision can be triggered at the present price and depict the overall specific
period can be hold by issuer. Moreover, bonds with call provision directly provide
investors higher interest rate than the non-cancellable bonds (Tewari, Byrd & Ramanlal,
2015).
 Lastly, call provision directly help companies to refinance their overall debt conditions by
reducing the interest rate debts from the capital market.
2. Defining a discount bond and a premium bond:
Discount bond is considered to be an instrument where it is traded below the issue
price. On the other hand, premium bonds are the financial instruments that trade above the
issuance price. From the overall analysis, it is detected that bonds issued have certain par