Question

Rocket Enterprises has a 20-year bond issue outstanding that pays a 5% coupon. The bond is currently prices at $915.60 and has par value of $1,000. The bond also pays coupons semiannually. You just purchase ten of them as investment. I What is the yield to maturity of the bond you hold? II Five years go by and interest rates in the economy goes down by 2% and Rocket Enterprises’ bond’s YTM also declines by 2%. Unfortunately, you desperately need cash and will have to sell your bonds. Your friend offers $1,100 for each. Would you sell to your friend? Why or why not?

Answer 1

Since the coupon payments are made semiannually, the number of periods = 20*2 =40

Semiannual coupon payment = (5%/2)*$1000

= $25

Yield to maturity is calculated in excel

T

I).The yield to maturity is 5.71%

II). The value of Bond after 5 years is $1146.95

Since the value of Bond after 5 years is less than the offered price $1100, selling the Bond at the offering price would incur a loss of $46.95 on each Bond.

Therefore, one would not sell the Bond at the price offered by his friend.