Question

In: Finance

A firm issues a 10-year, $1,000 par value bond. The required rate of return is 10%....

A firm issues a 10-year, $1,000 par value bond. The required rate of return is 10%.

1. What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $878.00? Another bond that sells for $1,134.20? What does a bond selling at a discount or at a premium tell you about the relationship between r_d and the bond’s coupon rate?

2.What are the total return, the current yield, and the capital gains yield for the discount bond in Question 3 at $878.00? At $1,134.20? (Assume the bond is held to maturity and the company does not default on the bond.)

Expert Solution

Q - 1

YTM for the discount bond = RATE (Period, PMT, PV, FV) = RATE (10, 9% x 1000, -878, 1000) = 11.08%

YTM for the premium bond = RATE (Period, PMT, PV, FV) = RATE (10, 9% x 1000, -1134.20, 1000) = 7.08%

A bond selling at a discount will have YTM (r_d) > Coupon rate while a bond trading at a premium will have YTM (r_d) > the bond’s coupon rate

Q - 2

Total Return = YTM

Current Yield = Annual coupon / Current Price

Capital Gains yield = YTM - Current Yield

For the discount bond in Question 3 at $878.00

Total Return = YTM = 11.08%

Current Yield = Annual coupon / Current Price = 9% x 1000 / 878 = 10.25%

Capital Gains yield = YTM - Current Yield = 11.08% - 10.25% = 0.83%

For the premium bond in Question 3 at At $1,134.20

Total Return = YTM = 7.08%

Current Yield = Annual coupon / Current Price = 9% x 1000 / 1,134.20 = 7.94%

Capital Gains yield = YTM - Current Yield = 7.08% - 7.94% = - 0.85%

jeff jeffy answered 6 months ago

Bond XYZ is a 4-year, 8% annual coupon bond, with $1,000 par value. The required return...

Bond XYZ is a 4-year, 8% annual coupon bond, with $1,000 par value. The required return on the bond is 5.4%. 1)What is the duration, 2) What is the modified duration of this bond?

The current price of a 10-year, $1,000 par value bond is $1,000. Interest on this bond...

The current price of a 10-year, $1,000 par value bond is $1,000. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond? a. 10% b. 12% c. 14% d. 17% e. 21%

For a bond of a given par value, the higher the investor's required rate of return...

For a bond of a given par value, the higher the investor's required rate of return is above the coupon rate, the The stock of Business Adventures sells for $80 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Stock Price Dividend Recession $76 $0.75 Normal economy 82 2.50 Boom 87 3.00 Calculate the expected return and standard deviation of a...

You are considering a 10-year, $1,000 par value bond. Its coupon rate is 10%, and interest...

You are considering a 10-year, $1,000 par value bond. Its coupon rate is 10%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 11.2510%, how much should you be willing to pay for the bond? Do not round intermediate calculations. Round your answer to the nearest cent.

Consider a bond with a par value of $1,000, a coupon rate of 8%, and 10...

Consider a bond with a par value of $1,000, a coupon rate of 8%, and 10 years until maturity. What is the most you should pay for this asset if your required rate of return for assets like this is 5% and the coupon payments are paid annually? How does your answer change if the bond is semi-annual? Does the semi-annual bond sell at a premium or a discount?

A $1,000 par-value bond with 5 years of maturity pays a 7% coupon rate, paid annually. What is the value of the bond if your required rate of return is 7%?

A $1,000 par-value bond with 5 years of maturity pays a 7% coupon rate, paid annually. What is the value of the bond if your required rate of return is 7%?A $1,000 par-value bond with 5 years of maturity pays a 5% coupon rate, paid semi-annually. What is the value of the bond if your required rate of return is 8%?

a) On March 1, 2016, Corporation issues a $1,000 par value bond with a 10 percent...

a) On March 1, 2016, Corporation issues a $1,000 par value bond with a 10 percent coupon (paid semi-annually) that matures in exactly two years. If the yield to maturity is 7%, at what price should the bond sale? b) If the yield to maturity remains at 7%, at what price should the bond sell on May 1, 2016 (2 months after issue)? what is the dirty price on May 1, 2016? c) Actions by the Fed cause market interest rates...

A firm issues its 5-year, 9%, $200,000 Par value bond. The market rate is 12%. The...

A firm issues its 5-year, 9%, $200,000 Par value bond. The market rate is 12%. The company uses the straight-line method to amortize bond premiums and discounts. The bonds pay interest semi-annually. Present Value Factor: 6%, n=10 Annuity Present value factor is 7.36009 Single sum Present value factor is 0.55839 What is the bond price? Record the sale of the bond Record the first interest payment Record the second interest payment Record the final payment of the Face Value Prepare the amortization table

8. What is the YTM of a $1,000 par value bond with a 10% coupon rate,...

8. What is the YTM of a $1,000 par value bond with a 10% coupon rate, semi-annual coupon payments, and 9 years to maturity if the bond currently sells for $900? Round to the nearest hundredth percent. Do not include a percent sign in your answer. (i.e. If your answer is 4.32%, then type 4.32 without a % sign) 9. Ford Motors’ bond is currently traded at the value of $1,208.70 and a yield of 4.22%. The current rating of...

You are considering a 10-year, $1,000 par value bond. Its coupon rate is 8%, and interest...

You are considering a 10-year, $1,000 par value bond. Its coupon rate is 8%, and interest is paid semiannually. The data has been collected in the Microsoft Excel Online file below. If you require an "effective" annual interest rate (not a nominal rate) of 10.16%, how much should you be willing to pay for the bond? Do not round intermediate steps. Round your answer to the nearest cent.