Delt Computer Corporation has issues bonds that have a 9 percent coupon rate, payable quarterly. The...

Delt Computer Corporation has issues bonds that have a 9 percent coupon rate, payable quarterly. The bonds mature in 8 years, have a face value of $1,000 and a yield of 8.5%.

a. Calculate the price of the bonds

b. how does interest rate risk and credit risk impact the price of a bond?

Expert Solution

Since there are more than one part in the question and nothing is mentioned on which part to be done, hence, completing the first part.

a) FV = 1000; T = 8 years

Coupon rate = 9% payable quarterly; YTM = 8.5%

Quarterly coupon rate = 9% / 4 = 2.25%

Quarterly Interest Payments = 2.25% * 1000 = 22.5

Price of Bond = Summation of Present Values of Interest payments + Present Value of Principal repayment at maturity

As interest payments remains same for 32 (8 * 4) periods, we can treat as an Annuity and calculate its present value using Annuity formula

Annuity formula = (C / (YTM)) * (1 - (1 + YTM)^-ⁿ

Present Value of Interest Payments = (22.5 / (8.5% / 4)) * (1 - (1+8.5% / 4)^-32 = 518.57

Now we will calculate Present Value of Principal repayment at maturity.

Present Value of Principal Payment = (1000 / (1+8.5% / 4)³²) = 510.24

Price of Bond = PV of Interest Payments + PV of Principal = 518.57 + 510.24 = 1028.81

jeff jeffy answered 2 years ago

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