Question

The University of California has two bonds outstanding. Both issues have the same credit rating, a face value of $1,000 and a coupon rate of 3%. Coupons are paid twice a year. Bond A matures in 1 year, while bond B matures in 30 years. The market interest rate for similar bonds is 10%.

Part 1

What is the price of bond A?

Attempt 1/5 for 10 pts.

Part 2

What is the price of bond B?

Attempt 1/5 for 10 pts.

Part 3

Now assume that yields increase to 13%. What is the price of bond A?

Attempt 1/5 for 10 pts.

Part 4

What is now the price of bond B?

A GM and a Ford bond both have 4 years to maturity, a $1,000 par value, a BB rating and pay interest semiannually. GM has a coupon rate of 6.2%, while Ford has a coupon rate of 5.3%.

   Attempt 1/5 for 10 pts.

Part 1

The GM bond trades at 94.59 (percent of par). What is the yield to maturity (YTM)?

Attempt 1/5 for 10 pts.

Part 2

What should be the price of the Ford bond (in $)?

A bond has an annual coupon rate of 4.4%, a face value of $1,000, a price of $1,166.29, and matures in 10 years. What is the bond's YTM?

Boeing has a bond outstanding with 15 years to maturity, a $1,000 par value, a coupon rate of 6.9%, with coupons paid semiannually, and a price of 100.93 (percent of par).

If the company wants to issue a new bond with the same maturity at par, what coupon rate should it choose?

A corporate bond has 16 years to maturity, a face value of $1,000, a coupon rate of 4.8% and pays interest semiannually. The annual market interest rate for similar bonds is 3.3% What is the price of the bond?

Answer 1

Answer to Question 1:

Part 1:

Bond A:

Face Value = $1,000

Annual Coupon Rate = 3.00%
Semiannual Coupon Rate = 1.50%
Semiannual Coupon = 1.50% * $1,000
Semiannual Coupon = $15

Time to Maturity = 1 year
Semiannual Period = 2

Annual Interest Rate = 10.00%
Semiannual Interest Rate = 5.00%

Current Price = $15/1.05 + $15/1.05^2 + $1,000/1.05^2
Current Price = $15 * (1 - (1/1.05)^2) / 0.05 + $1,000 / 1.05^2
Current Price = $934.92

Part 2:

Bond B:

Face Value = $1,000

Annual Coupon Rate = 3.00%
Semiannual Coupon Rate = 1.50%
Semiannual Coupon = 1.50% * $1,000
Semiannual Coupon = $15

Time to Maturity = 30 year
Semiannual Period = 60

Annual Interest Rate = 10.00%
Semiannual Interest Rate = 5.00%

Current Price = $15/1.05 + $15/1.05^2 + … + $15/1.05^60 + $1,000/1.05^60
Current Price = $15 * (1 - (1/1.05)^60) / 0.05 + $1,000 / 1.05^60
Current Price = $337.47

Part 3:

Bond A:

Face Value = $1,000
Semiannual Coupon = $15
Semiannual Period = 2

Annual Interest Rate = 13.00%
Semiannual Interest Rate = 6.50%

Current Price = $15/1.065 + $15/1.065^2 + $1,000/1.065^2
Current Price = $15 * (1 - (1/1.065)^2) / 0.065 + $1,000 / 1.065^2
Current Price = $908.97

Part 4:

Bond B:

Face Value = $1,000
Semiannual Coupon = $15
Semiannual Period = 60

Annual Interest Rate = 13.00%
Semiannual Interest Rate = 6.50%

Current Price = $15/1.065 + $15/1.065^2 + … + $15/1.065^60 + $1,000/1.065^60
Current Price = $15 * (1 - (1/1.065)^60) / 0.065 + $1,000 / 1.065^60
Current Price = $248.35