Assignment: Interest Rates and Debt Securities Assessment
We have two purposes in this assignment: 1) to understand these various drivers to interest rates, and 2) to better understand the valuation methods associated with debt securities
Write 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 an explanation 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 U.S. Treasury yield curve. Present the three main types of yield curves with regard to shape. Illustrate with numerical examples of how future inflation impacts the 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 a corporate bond with a par value at maturity of $1,000, a maturity of 20 years, a coupon interest rate of 7%, and a yield to maturity of 4%. 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, year 10, year 12, year 14, year 16, year 18, and year 20.
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.
