In: Finance
Q3) What is the price of a $1,000 par value, semi-annual coupon bond with 18 years to maturity, a coupon rate of 08.60% and a yield-to-maturity of 05.10%? (1 point) Q4) What is the price of a $1,000 par value, 18 year, annual coupon bond with a 05.80% coupon rate and a yield to maturity of 04.90%? (1 point) Q5) You bought a 20-year, 07.30% semi-annual coupon bond today and the current market rate of return is 06.30%. The bond is callable in 7 years with a $50 call premium. What price did you pay for your bond? (2 points)
Q3
The price of a bond is the present value of the expected cash flows on the bond discounted at YTM. Hence the price is $1409.02/- ,computed as follows-
Year | Cash flow | PVF/[email protected]% | Present Value |
1-36 | 43 | 23.3749 | 1005.12 |
36 | 1000 | .4039 | 403.90 |
1409.02 |
Note: *Since it is semi annual coupon bond, Interest is taken as 43(1000*8.6%/2), YTM is taken as 2.55(5.1/2) and period is taken as 36(18*2)
* Since no information is provided redeeemed at par.
Q4
Year | Cash Flow | PVF/[email protected]% | Present Value |
1-18 | 58 | 11.7814 | 683.32 |
18 | 1000 | .4227 | 422.70 |
Hence the price is $1106.02/-
* Since no information is provided redeeemed at par.
Q5
The price of a bond is the present value of the expected cash flows on the bond discounted at an interest rate that is appropriate to the risskness of that bond. Hence here 6.30% is taken which is the current market rate of return.
Year | Cashflow | PVF/[email protected]% | Present Value |
1-14 | 36.5 | 9.1247 | 333.05 |
14 | 1050(1000+50) | .4251 | 446.36 |
Hence the price is $779.41/-