Brigham and Houston Essay

1. Whenever we are kindleed in buying a pose from the draw market, the adheres issuer promises to grant back the principal (or par value) when the bond matures (Brigham and Houston, 2001). During this era, the issuer is obliged to pay interest in order to compensate the use of money. The interest payment is do on voucher rate which is fixed. There is an inverse relationship in the midst of the voucher rate and the bond charges, when Interest rate increase, leads to rise in income, whereas the determine of the bond declines. Interest rate decrease, leads to decline in income, whereas the price of the bond rises. also we need to consider that the coupon rate is mutually related to duration because higher coupon order lead to quicker recovery of the bonds value, resulting in a shorter duration, relative to abase coupon rates. If coupon rate is great than the market rate accordingly it is favourable for issuer and if coupon rate is less than the market rate and then it is favourable for purchaser (Brigham and Houston, 2001).The reason behind the variations in the coupon rates of various bonds is the market interest rate companys performance, time length, and credit worthiness of the issuer. So, all these factors have an implication on the bond yields. 2. Ratings of these bonds are determined on the basis of both qualitative and quantitative factors few of which are listed below If a company uses right write up policies, its reported earnings will be higher than if it uses less conservative procedures. Various ratios including the debt ratio and the Times Interest Earned (TIE) ratio in addition have some implications on these bond ratings. If company explores any new-sprung(prenominal) sites containing oil, gas, coal fields etc. Increase in the companys deals & net profit increase both domestically and internationally also uplift the bond ratings and it showed that debt holder show the confidence on the companys policy. Bond ratings might take a prevail over(prenominal) leap when There is a signal of bankruptcy, internal mismanagement and fiscal distress in the firm (Helfert, 2001). When the company does not abide by the law, i. e. it breaches the laws, this may be related to environment, etc. When the product life bike is going downwards and company cant add more products in their product line. Negative bond covenants also hits the bond ratings of the company. comminute unrest or strikes may cause instability in the bonds ratings. economicalal quoin in the country. 3. We know that whenever the interest rate rises, bond prices bleed to fall, and when rates fall, bond prices tend to rise (Helfert, 2001). This primarily occurs due to the economic condition of the country and also because of the market sentiments.If the price of the bond goes down it is less attractive (pays less interest) in affinity with current offerings and when the price of the bond goes up it is more attractive (pays more interest) in comparison with current offerings. This may also be described as when the coupon rate is greater than market rate then it is favourable for issuer and if coupon rate is lesser than market rate then it is favourable for the purchaser. rough bonds are sold below par value, which means (at force out) or greater than par value, which means (at premium).This mainly occurs due to the risk perceived for the debt of that feature organization. Market interest rate fluctuations usually effect the performance of the bonds in the secondary markets. Federal bank monetary and fiscal policy, inflation rate, recession in the economy, etc are the factors that may force organizations to sell the bonds at discount or at premium. One must also consider that sale of bonds on discount or at premium also has some impact on the yield and also the maturity of the bond, the shorter a bonds maturity, the less its duration.Bonds with higher yields also have lower durations. Also the companys performance reflects in bond valuations, i. e. its bond ratings, bond covenants and credit worthiness etc (Helfert, 2001). 4. The yield to maturity (YTM) is a reflection of the turn over on investment, that is earned at the current price, incase the bond is held by the issuer to its date of maturity and redeemed at par value. In early(a) words, YTM is the discount rate that equates the present value of future inflows from the bond tint to its present price.