Interest Rates and Debt Securities Assessment
You will develop an assessment in which you address the following problems/questions:
Form a discussion on the possible determinants of market interest rates. For each determinant offer illustration for when that determinant may tend to be either stronger or weaker and what is the driving force for that differential impact. For example, when would the default risk premium be stronger verse weaker and what seems to be the drivers to that stronger or weak impact?
Present and explain the yield curve. Present the three main type of yield curve with regard to shape. Illustrate with numerical examples how future inflation impacts they yield curve.
Describe the different types of debt securities. This should be a list of the various securities in each class along with relevant information that defines each security.
Develop a valuation model for the long-term corporate bond with a face value at maturity of $100,000, a maturity of 10 years, a coupon interest rate of 6%, and a market yield of 8%. The coupons are assumed to be paid semi-annually. In your development and presentation, include a time line showing the relevant cash flows along with all of the steps that allow you to generate the value (price of the bond).
Given the problem above, identify how the bond price will be expected to adjust across time as the bond approaches maturity. You should calculate the price after each 2-year period has passed – i.e., after year 2, year 4, year 6, year 8 and year 10. Graph the resulting movement in the price across time using the resulting values. Explain how this movement in the bond price across time is important for the investor.