riod t= 0 price $900, with pa 3 1050 ond
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
Consider a coupon bond, period t = 0 price $900, with payments: t=0 1 2 3 50 50 1050 Discount (zero coupon) bonds of 1, 2 and 3 years maturity (all with maturity value of $1000) sell for respectively, 960, 900, 820 dollars. Is this coupon bond properly priced ? If not, design an arbitrage argument to profit by the mispricing.
Transcribed Image Text:Consider a coupon bond, period t = 0 price $900, with payments:
t=0 1 2
3
50 50 1050
Discount (zero coupon) bonds of 1, 2 and 3 years maturity (all with maturity
value of $1000) sell for respectively, 960, 900, 820 dollars. Is this coupon
bond properly priced? If not, design an arbitrage argument to profit by the
mispricing.
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