Accounting: Interest and Bond
Part 3
Valuation of Securities
Chapters in this Part
Chapter 6
Interest Rates and Bond Valuation
Chapter 7
Stock Valuation
Integrative Case 3: Encore International
© 2012 Pearson Education, Inc. Publishing as Prentice Hall
Chapter 6
Interest Rates and Bond Valuation
Instructor’s Resources
Overview
This chapter begins with a thorough discussion of interest rates, yield curves, and their relationship to required returns. Features of the major types of bond issues are presented along with their legal issues, risk characteristics, and indenture convents. The chapter then introduces students to the important concept of valuation and demonstrates the impact of cash flows, timing, and risk on value. It explains models for valuing bonds and the calculation of yield-to-maturity using either an approximate yield formula or calculator. Students learn how interest rates may affect their ability to borrow and expand business operations or assets under personal control.
Suggested Answers to Opener in Review Questions
a. With short-term interest rates near 0 percent in 2010, suppose the Treasury decided to replace maturing notes and bonds by issuing new Treasury bills, thus shortening the average maturity of
U.S. debt outstanding. Discuss the pros and cons of this strategy.
The U.S. Treasury would face many of the same considerations as those faced by a company that is considering revision of its average debt maturity. Short-term rates are normally lower, reducing total financing costs. However, if the U.S. Treasury relies on short-term rates and short-term rates rise, the cost of financing the federal debt could end up being higher. Even more serious is the risk that the U.S.
Treasury may not be able to find buyers of new Treasury bills when old Treasury bills mature.
According to market segmentation theory, there is a limited amount of demand for short-term securities. Excessive short-term demand might push up the cost
Valuation of Securities
Chapters in this Part
Chapter 6
Interest Rates and Bond Valuation
Chapter 7
Stock Valuation
Integrative Case 3: Encore International
© 2012 Pearson Education, Inc. Publishing as Prentice Hall
Chapter 6
Interest Rates and Bond Valuation
Instructor’s Resources
Overview
This chapter begins with a thorough discussion of interest rates, yield curves, and their relationship to required returns. Features of the major types of bond issues are presented along with their legal issues, risk characteristics, and indenture convents. The chapter then introduces students to the important concept of valuation and demonstrates the impact of cash flows, timing, and risk on value. It explains models for valuing bonds and the calculation of yield-to-maturity using either an approximate yield formula or calculator. Students learn how interest rates may affect their ability to borrow and expand business operations or assets under personal control.
Suggested Answers to Opener in Review Questions
a. With short-term interest rates near 0 percent in 2010, suppose the Treasury decided to replace maturing notes and bonds by issuing new Treasury bills, thus shortening the average maturity of
U.S. debt outstanding. Discuss the pros and cons of this strategy.
The U.S. Treasury would face many of the same considerations as those faced by a company that is considering revision of its average debt maturity. Short-term rates are normally lower, reducing total financing costs. However, if the U.S. Treasury relies on short-term rates and short-term rates rise, the cost of financing the federal debt could end up being higher. Even more serious is the risk that the U.S.
Treasury may not be able to find buyers of new Treasury bills when old Treasury bills mature.
According to market segmentation theory, there is a limited amount of demand for short-term securities. Excessive short-term demand might push up the cost