Question

Here are data on ​$1,000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following​ questions:

a. Assuming interest is paid​ annually, calculate the values of the bonds if your required rates of return are as​ follows: Microsoft, 3 percent; GE​ Capital, 8 ​percent; and Morgan​ Stanley, 12 ​percent; where:

	Microsoft	GE Capital	Morgan Stanley
Coupon interest rate	5.00 %	4.00 %	4.50 %
Years to Maturity	29	12	9

b. The bonds are selling for the following​ amounts:

Microsoft ​$1,474

GE Capital        ​$795

Morgan Stanley ​$507

What are the expected rates of return for each​ bond?

c. How would the value of the bonds change if​ (1) your required rate of return ​(rb​) increased 2 percentage points or​ (2) decreased 2 percentage​ points?

d. Explain the implications of your answers in part c in terms of interest rate​ risk, premium​ bonds, and discount bonds.

e. Should you buy the​ bonds? Explain.

Answer 1

d)

From the above we can derive the relation between the interest rate ,coupon and price of the bonds

when Interest rate = Coupon bond will trade at par value

When interest rate > coupon rate , bond will trade at discount

when Interest rate < coupon rate , bond will trade at premium

e)

Microsoft :

From above calculations actual price = 1383.77 but it is selling at $1474 - Over priced , do not buy

GE capital : Actual Price = $698.56 but it is selling for $795 - Over priced , Do not buy

Morgan stanley: Actual Price = Actual Price $600.38 but it is selling for $507 - under priced , Buy it

Formulas will be as follows: