Question

In: Finance

Problem 4.3 part 2 On October 5, 2015, you purchase a $10,000 T-note that matures on...

Problem 4.3 part 2

On October 5, 2015, you purchase a $10,000 T-note that matures on August 15, 2027. (Settlement occurs two dayws after purchase, so you receive actual ownership of the bond on October 7, 2015). The coupon rate on the T-note is 4.375% and the current price quoted on the bond is 105.250%. The last coupon payment occurred on May 15, 2015 (145 days before settlement) and the next coupon payment will be paid on November 15, 2015 (39 days from settlement).

A) Calculate the annual yield to maturity (based on the clean price) for the bond purchased on October 7, 2013, and maturing on August 15, 2024 (or in 10.8603 years).

B) Explain in an essay of at least one full paragraph exactly why the bond in this problem is selling at a premium (ignore the accrued interest). That is, explain exactly why investors would be willing to pay more than face value for this bond, and in your answer address the issue of how newly issued bonds compete with this bond, which is being sold in the secondary market as a previously issued bond.      

Solutions

Expert Solution

Using the excel yield function, Yield(Settlement date, maturity date, annual coupon rate, price of bond per $100, redemption amount, interest frequency (2 for semi annual), basis= actual/actual)

Yield is 3.8198% i.e 3.82%

The bond is selling at a premium because the market rate of interest is less than the coupon rate on the bond, i.e the annual yield in the market is less than 4.375%.

Investors are willing to pay more than face value because the annual return they are getting is more than what the market provides. Thus, this increases the demand for the bond, which increases it's price, therefore pushing down the yield till the market yield is equal to the yield on the bond.

In case of a newly issued bond, the price will depend on many factor such as maturity, coupon payment, etc. In a well performing capital market, the issue price must be such that it provides a yield that is equal to the market rate of yield.


Related Solutions

On October 5, 2019, you purchase a $10,000 T-note that matures on August 15, 2031 (settlement...
On October 5, 2019, you purchase a $10,000 T-note that matures on August 15, 2031 (settlement occurs two days after purchase, so you receive actual ownership of the bond on October 7, 2019). The coupon rate on the T-note is 4.375 percent and the current price quoted on the bond is 105.250 percent. The last coupon payment occurred on May 15, 2019 (145 days before settlement), and the next coupon payment will be paid on November 15, 2019 (39 days...
On October 5, 2019, you purchase a $11,000 T-note that matures on August 15, 2031 (settlement...
On October 5, 2019, you purchase a $11,000 T-note that matures on August 15, 2031 (settlement occurs two days after purchase, so you receive actual ownership of the bond on October 7, 2019). The coupon rate on the T-note is 4.875 percent and the current price quoted on the bond is 105.75 percent. The last coupon payment occurred on May 15, 2019 (145 days before settlement), and the next coupon payment will be paid on November 15, 2019 (39 days...
On October 5, 2019, you purchase a $12,000 T-note that matureson August 15, 2031 (settlement...
On October 5, 2019, you purchase a $12,000 T-note that matures on August 15, 2031 (settlement occurs two days after purchase, so you receive actual ownership of the bond on October 7, 2019). The coupon rate on the T-note is 5.750 percent and the current price quoted on the bond is 105.59375 percent. The last coupon payment occurred on May 15, 2019 (145 days before settlement), and the next coupon payment will be paid on November 15, 2019 (39 days...
A 5% Treasury note matures in 12 months and has $10,000 face value. If the 6‐months...
A 5% Treasury note matures in 12 months and has $10,000 face value. If the 6‐months and 12‐months zero‐ coupon rates are 3% and 4% respectively, what is the YTM on the Treasury note? Specify your answer as a percentage with 4 digits after the decimal point.
This question 22 a Comprehensive Problem 5 Part A: Note: You must complete part A before...
This question 22 a Comprehensive Problem 5 Part A: Note: You must complete part A before completing parts B and C. Genuine Spice Inc. began operations on January 1 of the current year. The company produces 8-ounce bottles of hand and body lotion called Eternal Beauty. The lotion is sold wholesale in 12-bottle cases for $100 per case. There is a selling commission of $20 per case. The January direct materials, direct labor, and factory overhead costs are as follows:...
Comprehensive Problem 5 Part A: Note: You must complete part A before completing parts B and...
Comprehensive Problem 5 Part A: Note: You must complete part A before completing parts B and C. Genuine Spice Inc. began operations on January 1, 2016. The company produces a hand and body lotion in an eight-ounce bottle called Eternal Beauty. The lotion is sold wholesale in 12-bottle cases for $100 per case. There is a selling commission of $20 per case. The January direct materials, direct labor, and factory overhead costs are as follows: DIRECT MATERIALS Cost Behavior Units...
Comprehensive Problem 5 Part B: Note: This section is a continuation from Part A of the...
Comprehensive Problem 5 Part B: Note: This section is a continuation from Part A of the comprehensive problem. Be sure you have completed Part A before attempting Part B. You may have to refer back to data presented in Part A and use answers from Part A when completing this section. Genuine Spice Inc. began operations on January 1 of the current year. The company produces 8-ounce bottles of hand and body lotion called Eternal Beauty. The lotion is sold...
Comprehensive Problem 4 Part 2: Note: You must complete part 1 before part 2. After all...
Comprehensive Problem 4 Part 2: Note: You must complete part 1 before part 2. After all of the transactions for the year ended December 31, Year 1, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follows were taken from the records of Equinox Products Inc. Income statement data: Advertising expense $150,000 Cost of merchandise sold 3,700,000 Delivery expense 30,000 Depreciation expense—office buildings and equipment 30,000 Depreciation expense—store buildings and equipment 100,000...
Comprehensive Problem 4 Part 2: Note: You must complete part 1 before part 2. After all...
Comprehensive Problem 4 Part 2: Note: You must complete part 1 before part 2. After all of the transactions for the year ended December 31, 2016, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follows were taken from the records of Equinox Products Inc. Income statement data: Advertising expense $150,000 Cost of merchandise sold 3,700,000 Delivery expense 30,000 Depreciation expense—office buildings and equipment 30,000 Depreciation expense—store buildings and equipment 100,000 Dividend...
1) A 5‐year T‐Note with the face value of $10,000 pays 4% coupon rate. If the...
1) A 5‐year T‐Note with the face value of $10,000 pays 4% coupon rate. If the current interest rate is 1%, what is the price for this bond? (Set up the relevant equation to solve.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT