Question 3 Danielle Motors’ bonds have 5 years remaining to maturity. Interest is paid annually, the...

Question 3

Danielle Motors’ bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8 percent. The bonds have a yield to maturity of 9 percent.

Required

What is the current market price of these bonds?
Compute the current yield
Compute the duration of the bond
Compute the modified duration and interpret your results

Solutions

Expert Solution

Current market price of the bond

Year	CF	PVF@9%	Disc CF
1	$ 80.00	0.9174	$ 73.39
2	$ 80.00	0.8417	$ 67.33
3	$ 80.00	0.7722	$ 61.77
4	$ 80.00	0.7084	$ 56.67
5	$ 80.00	0.6499	$ 51.99
5	$1,000.00	0.6499	$ 649.93
Market price of the bond	$ 961.10

Current yeild = Annual coupon payment / current market price

= 80 / 961.1

= 8.32%

Duration

Year	CF	PVF@9%	Disc CF	Weights	Weights * Year
1	$ 80.00	0.9174	$ 73.39	0.0764	0.0764
2	$ 80.00	0.8417	$ 67.33	0.0701	0.1401
3	$ 80.00	0.7722	$ 61.77	0.0643	0.1928
4	$ 80.00	0.7084	$ 56.67	0.0590	0.2359
5	$ 80.00	0.6499	$ 51.99	0.0541	0.2705
5	$ 1,000.00	0.6499	$ 649.93	0.6762	3.3812
Duration					4.2968

Modified Duration = Duration / (1+YTM)

= 4.2968 / (1+ 0.09)

= 4.2968 / (1.09)

= 3.9421

Pls do rate, if the answer is correct and comment, if any further assistance is required.

jeff jeffy answered 1 year ago

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