Calculating bond prices is a primary aspect among investors. Using the above formula, companies that offer bonds at the rate of 6 to 10 percent would be priced as indicated below. Hence for the company that offers an annual interest rate of 10 percent, the bond price would be 89 dollars while the company that offers an annual rate of six percent, the price would be 98 dollars. The bond, which has an interest rate of six percent, has a better price since it stands at 98 as opposed to the one that has an interest rate of 10 percent since its price is 89 dollars.
Zero-coupon bonds mature after the specified number of years multiplied by two. The zero Coupon Bond Price is attained from M/ (1+i) power n for the 3M Company, the calculation is as follows. 1 000 /1+0.03) power 10= $7 44.09.
From the first issue day, bonds earn interest. Bonds are however sold at face value. The interest rates are a combination of two rates, the inflation and fixed rates. The fixed rate is announced at specified periods and remains unchanged for its whole life. The inflation rate takes care of changes due to variations in the consumer price index. Thus, it varies with time.
Focus on the time value of money makes it clear that the bonds, which hold an interest of 10 percent, have a lower time value than are those bonds having a lesser percentage of interest rates. The credit rating of a company reflects the credit worth of an enterprise. Those enterprises that have lower prices on their bonds are more likely to be trusted. The firms with lower credit ratings have to offer attractive packages in terms of pricing in order to entice investors. In the table below, the company that offers ten percent interest rates has better credit ratings than the ones, which offer six percent interest rates. In paying back loans, the issue of credit rating ranks highly. Thus, companies that have poor ratings are seen as highly likely to default. In this case, the companies that have an interest rate of 10 percent are seen as more credit worthy than those whose interest rates are at 6 percent. Thus, the banks view the latter company as more secure and having the ability to pay.
Banks have a habit of charging varied rates on their loans. Those companies that have a higher credit rating are charged lesser than those that have poor records. The reason is that the creditable companies have lower chances of defaulting. Investors find useful information in credit rating of companies. It is noticeable that highly rated companies in terms of credit present better investment opportunities as opposed to poorly rated ones. From a company’s point of view, the higher interest rates are preferable.
In calculating the current yield, the following formula is employed.
Since the company’s bond par value is one hundred dollars for ninety five point nine two, and the coupon rate is at five percent, the current yield is 0.05*100/95.92*(100)=5.21% This calculation does not however factor any capital gains or losses that may arise were investors to be given discounts.