I need to paraphrase Essay Example | Topics and Well Written Essays - 750 words

I need to paraphrase - Essay Example re cash flow, then the value of the asst is determined by discounting the future cash flows properly through taking into account the total of all the cash flows. d) The value of bonds is determined by the discounted value of the Principal and all the coupon payments and this is done through the use of discount rate. For instance, a ten year value bond that has a value of 10 % will yield value of 1000 or par. g) It can be observed that annual payment of 10 year bond is more risky compared to a similar bond of one year since the value is derived from cash flows that are closer to the current date and vice versa in case of the first one. Slight changes in the yield mean big changes in the discounted far away cash flow values. This results in more fluctuation of the 10 year bond. h) When discount rate (yield) is used to discount the future cash flows, it is assumed that the same return on the investment as the discount rate would be obtained. As commonly known, the discount rate or the current expected return constantly fluctuates depending on the market situation which means that the expected return might not be obtained. This type of risk is referred to as reinvestment risk. i) When there are semiannual payments, the number of periods used also increases. When there is a 10 year semiannual coupon bond with rate of 10% coupon while the current nominal rate is pegged at 13%, the value of the bond would be USD 834.72. j) If a 10 year bond with coupon of 10% as well prevailing interest rate of 10%, between an annual coupon bond and semiannual is bought, the semiannual one is bought while the cash flows are received more quickly. In such a scenario, both coupon rates and current interest rates are the same where there is no price difference. In the event that the coupon rate is different from the nominal rate, a difference is found. For instance, if the current nominal rate is 8%, the annual coupon bond will then be valued at USD 1134.20 while the semiannual is