Corporate Bonds

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Question: please please help!! in this bond financial question?

2-a corporate bond with an original maturity of 10 years and a face value of $1000000. it has a coupon rate of 7%, annual payments, and seven years to maturity. current yields on bonds of similar risk are 6.75%. value this bond.

Answer: $1,114,000. It sells at a premium because it has a higher interest rate..

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Question: What are disadvantage and advantages of Corporate Bonds?

Answer: Advantages of Corporate Bonds are as follows:

They are provide a fixed stream of income so they are safer than stocks. Also, bond holders get paid by companies before stock holders. For example, companies are required to make interest payments to bondholders, but are not required to make dividend payments to stock holders. Another example of this is that if the company went bankrupt, the bond holders would be the ones to get the proceeds from auctioning off the company's assets and the stock holders would get nothing. Another advantage of Corporate Bonds over government bonds is that they provide higher interest.
The reason for this is because interest rates are made up of a few ingredients. First is the real interest rate (the actual money you are receiving simply for loaning money), then the inflation premium (bonds have to pay extra interest so that bond holders don't have the value of their payments decline due to inflation), then is the liquidity premium (this is extra interest bond issuers have to pay if their bond is not easily bought and sold. government bonds have virtually no liquidity premium because they are bought and sold constantly, but Corporate Bonds will have some liquidity premium because they are not traded as heavily as government bonds, next is the default risk premium (this is extra interest paid by corporations to compensate bondholders for the risk of lending to a company that could potentially go broke), and lastly is the maturity risk premium (extra interest paid to compensate long-term bondholders for assuming the risk of seeing the market rate of interest change over the life of the bond).
Now that we have that established we can understand why Corporate Bonds offer higher interest than government bonds or municipal bonds. Let's start from the beginning, Corporate Bonds and government bonds are both subject to inflation (except government indexed bonds which are adjusted for inflation) so they have the same inflation premium. Now we get to the liquidity premium, and here is where they first differ. Corporate Bonds have to offer a higher interest rate than gov. bonds because they are nowhere nearl as heavily traded as government bonds so it's much harder to buy and sell a corporate bond without losing any value. Next is the default risk premium. This is where the biggest difference is. U.S. government bonds are considered to be the safest investments in the world. There is basically no risk that the U.S. government will default on its loans. Therefore, government bonds have no default risk premium. On the other hand, corporations can and do go bankrupt. Because of this risk, Corporate Bonds have to offer higher interest than government bonds to compensate lenders for assuming this extra risk. Furthermore, some corporations are more likely to go bankrupt than others. Firms like Standard and Poor's or Moody's give companies debt ratings so you can see how safe or risky that company's bonds are. A grade of AAA or Aaa is the safest corporation while anything below Baa is usually considered to be "junk" which is just a way of saying high-risk but also high-interest bonds. The last aspect of interest rates, the maturity risk premium, varies based on the time to maturity of the bond but does not vary between government bonds and Corporate Bonds. So, in summation, Corporate Bonds offer higher interest because they have to offer investors compensation for liquidity risk and default risk.

Disadvantages of Corporate Bonds:
The disadvantages of Corporate Bonds Are basically the same as the advantages but from a different point of view. As I said earlier, bonds are considered safer than stocks because they offer a steady flow of income while there is no guaranteed income from a stock. However, stocks offer greater potential returns if its price increases. So in this way, bonds and stocks obey a fundamental rule of economics: with greater risk there is greater reward. So in periods of slow economic growth, bonds may look more attractive because it is unlikely stocks will provide good returns. In a period of expansion, however, stocks look much more attractive than bonds because you could make a lot more in much less time if your stocks go up. Another disadvantage of coporate bonds over government bonds is that corporate bonds have more risk. While this does offer a higher yield in return, if you are risk averse, you would view this as a disadvantage of corporate bonds.

Davos Open Forum 2010 - After the Financial Crisis: Consequences and Lessons Learned