Question

USE THE FOLLOWING INFORMATION ON PROBLEMS 1-5.

Vulpis Inc. has just made an issue of 20-year maturity $1,000 par value bonds with a 9% coupon rate. The bond is currently selling in the market for $1,200.

If the required rate of return on comparably risky bonds is 6%, what is the intrinsic value of Vulpis Inc. bonds?

		$1,401.04
		$1,346.72
		$1,244.10
		$1,198.51

Vulpis Inc. has just made an issue of 20-year maturity $1,000 par value bonds with a 9% coupon rate. The bond is currently selling in the market for $1,200.

What is the bond's YTM?

		4.55%
		5.92%
		7.11%
		9.20%

Vulpis Inc. has just made an issue of 20-year maturity $1,000 par value bonds with a 9% coupon rate. The bond is currently selling in the market for $1,200.

Suppose that the overall required rate of return on all bonds in the market goes up by 1% immediately after Vulpis Inc. issues their bonds. If the market now requires 7% on bonds, what is the intrinsic value of Vulpis Inc. bonds?

		$1,031.17
		$1,157.49
		$1,213.55
		$1,343.08

Answer 1

Solution to QUESTION-1

Intrinsic value of Vulpis Inc. bonds

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 9.00% x ½]	PMT	45
Market Interest Rate or Yield to maturity on the Bond [6.00% x ½]	1/Y	3
Maturity Period/Time to Maturity [20 Years x 2]	N	40
Bond Price/Current market price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,346.72.

“Hence, the Intrinsic Value of the Bond will be $1,346.72”

Solution to QUESTION-2

Yield to maturity of (YTM) of the Bond

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 9.00% x ½]	PMT	45
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [20 Years x 2]	N	40
Bond Price/Current Market Price of the Bond [-$1,200]	PV	-1,200

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the semi-annual yield to maturity on the bond (1/Y) = 3.555%.

The semi-annual Yield to maturity = 3.555%.

Therefore, the annual Yield to Maturity of the Bond = 7.11% [3.555% x 2]

“Hence, the Yield to maturity of (YTM) of the Bond will be 7.11%”

Solution to QUESTION-3

Intrinsic value of Vulpis Inc. bonds

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 9.00% x ½]	PMT	45
Market Interest Rate or Yield to maturity on the Bond [7.00% x ½]	1/Y	3.50
Maturity Period/Time to Maturity [20 Years x 2]	N	40
Bond Price/Current market price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,213.55.

“Hence, the Intrinsic Value of the Bond will be $1,213.55“