Brigham and Houston Essay Example for Free

Brigham and Houston Essay1. Whenever we are touched in buying a stay put from the bond market, the bonds issuer promises to pay back the principal (or compare value) when the bond matures (Brigham and Houston, 2001). During this time, the issuer is oblige to pay bear on in order to compensate the use of money. The interest payment is made on verifier rate which is fixed. There is an inverse kinship between the coupon rate and the bond outlays, when Interest rate increase, leads to rise in income, whereas the value 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 inversely related to duration because higher(prenominal) coupon rates lead to quicker convalescence of the bonds value, resulting in a shorter duration, relative to lower coupon rates. If coupon rate is greater than the market rate then it is favourable for issuer and if coupon rate is less than the market rate 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 comp anys 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 innovation of both qualitative and quantitative factors some of which are listed below If a company uses conservative accounting 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 alike have some implications on these bond ratings. If company explores any new sites containing oil, gas, coal fields etc. Increase in the companys sales 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 downward parachute when There is a signal of bankruptcy, internal mismanagement and financial 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 cycle is going downwards and company cant add more products in their product line. electronegative bond covenants also hits the bond ratings of the company. Labour unrest or strikes may cause instability in the bonds ratings. Economic recession in the country. 3. We know that whenever the interest rate rises, bond prices tend 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 comparison with current offerings and when the price of the bond goes up it is more attractive (pays more interest) in co mparison 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. Some bonds are sold below par value, which means (at discount) or greater than par value, which means (at premium).This mainly occurs due to the risk perceived for the debt of that particular organization. Market interest rate fluctuations usually effect the performance of the bonds in the secondary markets. federal official 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. unrivalled 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 pe rformance 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 return on investment, that is earned at the current price, incase the bond is held by the issuer to its succession of maturity and redeemed at par value. In other words, YTM is the discount rate that equates the present value of future inflows from the bond equal to its present price.