Question

1. Calculate the value of a fixed rate bond with fifteen years left to maturity, annual coupon payments at a coupon rate of 5.0%, face value of $1,000, and yield-to-maturity of 3.5%. hint: See solution for similar problem in lecture presentation on Bonds. Should the calculated value be greater than or less than $1,000?

2. Calculate the value of a fixed rate bond with fifteen years left to maturity, annual coupon payments at a coupon rate of 3.5%, face value of $1,000, and yield-to-maturity of 5%. hint: See solution for similar problem in lecture presentation on Bonds. Should the calculated value be greater than or less than $1,000?

3. Calculate the value of a fixed rate bond with fifteen years left to maturity, semi-annual coupon payments at a coupon rate of 5.0%, face value of $1,000, and yield-to-maturity of 3.5%. hint: See solution for similar problem in lecture presentation on Bonds. Should the calculated value be greater than or less than $1,000?

4. What is the yield-to-maturity of a corporate bond that has face value of $1,000, annual coupon payments of $35, is being quoted at 102.5, and has seven years left to maturity? hint: You need to use the Excel RATE function.

Answer 1

1. Maturity period = 15 years

coupon rate = 5%

face value of bond = $1000

yeild to maturity = 3.5%

current price of bond = 1000*5%*PVIFA(3.5%,15years) + 1000*PVIF(3.5%,15year)

= 50*11.5174 + 1000*0.596891

= 575.8705 + 596.891

= $ 1172.76

calculated value is greater than $ 1000.

2.

Maturity period = 15 years

coupon rate = 3.5%

face value of bond = $1000

yeild to maturity = 5%

current price of bond = 1000*3.5%*PVIFA(5%,15years) + 1000*PVIF(5%,15year)

= 35*10.37966 + 1000*0.481017

= 363.288 + 481.017

= $ 844.31

Calculated value is less than $ 1000.

3. In semiannual -

Maturity period = 15 years

coupon rate = 5%

face value of bond = $1000

yeild to maturity = 3.5%

current price of bond = I/2*PVIFA(d/2,2n) + M*PVIF(d/2,2n)

Where i - coupon amount

d - annual interest rate

n - no. of periods

= 50/2*PVIFA(3.5%/2,2*15) + 1000*PVIF(3.5%/2,2*15)

= 25*23.18585 + 1000*0.594248

= 579.6462 + 594.2476

= $ 1173.89

calculated value is greater than $ 1000

4. Yield to maturity is the rate of return an investor earns on a bond held tll maturity.

IRR = 60% - (9.09/80.65*20%)

= 60% - 2.25%

= 57.75%

or we can use =IRR(sum of all cash flows) = 56.58%