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Essay / Research Paper Abstract
This 4 page paper is written in three parts. The first part considers what factors should be taken into account when determining the price to be paid for a bond which because of the value of $1000 in a years time. The second part looks at how a discount rate should be calculated and applied to that value. The third part of the paper compares three different companies to calculate prices based on assessed discount rates. The bibliography cites 3 sources.
Page Count:
4 pages (~225 words per page)
File: TS14_TEtargetbond.doc
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Unformatted sample text from the term paper:
For example, if Target are selling a bond that will guarantee a payment of $1,000 in a years time, then with the time value of money it would not
make sense to value the bond at $1,000 today. If the bond was purchased and then revenue at the same price then there would be a loss in real terms
as inflation over the year would erode the value of the money (Baye, 2007). Therefore, at the very minimum the investor should be considered a price which discounts the 1000
pounds by the expected rate of inflation. However, this does not provide a positive return and there are likely to be alternatives that would be able to provide a positive
return. To assess the price an investor may be prepared to pay requires consideration of competing or alterative purchases and their price as well as the economic conditions. For example,
if the investor has the potential to invest in a bank savings of deposit account, where there is no perceived risk then the price paid for the bond should reflect
at least the same interest rate. For example, if the bank is paying 5% per annum, the $1,000 paid by the bond should be the equivalent of at least 105%
of the original investment. However, if there is no risk with the bank and there is greater risk with the bond there should also be the consideration of what
is known as a risk premium. If the bond present a risk of the bank account is not, then the investor would be better off leaving the money with the
bank. The risk premium is the potential reward given to an investor for taking the additional risk (Howells and Bain, 2007). Therefore, as the perceived risk associated with the bond
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