Final answer:
The value of the Covetton House debenture in the secondary market would be higher than the par value since the coupon rate is above the current lower market yield of 5.81%. To find the exact value, the future coupon payments and the principal need to be discounted at the new yield, factoring in the remaining time to maturity.
Step-by-step explanation:
To calculate the value, or price, of an existing debenture in the secondary market when yields fall, we need to discount the future cash flows of the debenture to their present value using the new yield as the discount rate. The Covetton House debenture has a coupon rate of 10.63%, paid quarterly, over a remaining period of 9 years (36 quarters), after considering the 4 years out of 13 have passed. With the market yields now at 5.81% per annum, we will see a higher present value for these cash flows because the current market yield (discount rate) is lower than the coupon rate. The value will be higher than the par value, reflecting the fact that it is a desirable asset with an above-market coupon rate.
The debenture pricing formula involves discounting each coupon payment and the principal at the new yield to maturity (converting the annual rate to a quarterly rate). To determine the exact value, we would use the formula for the present value of an annuity for the coupon payments and add the present value of a lump sum for the final principal payment.