Question
In: Finance
Data on a bond: Face amount of bond : $1000 Terms of redemption: $1000 is redeemable...
Data on a bond:
Face amount of bond : $1000
Terms of redemption: $1000 is redeemable after 10 years
Coupon rate: 5% per year, payable semi-annually
X = Premium if the effective annual yield to maturity is 4%
Y = Discount if the effective annual yield to maturity is 6%
Compute the difference X minus Y
Solutions
Expert Solution
Coupoun rate per 6 month= 5% of 1000*6/12= 25
Prinicpal repayment after 10 years = 1000
Value of bond if YTM is 4% is given as
| Time | Coupon Interest | Principal | Total cash flow | Discounting rate at 4% | Discounted Cashflow |
| 5% of 1000*6/12 | |||||
| N in 6 Months | A | B | C=A+B | D=1/(1+4%)^N | E= C*D |
| 0.5 | 25.00 | - | 25.00 | 0.980580676 | 24.51 |
| 1 | 25.00 | - | 25.00 | 0.961538462 | 24.04 |
| 1.5 | 25.00 | - | 25.00 | 0.942866034 | 23.57 |
| 2 | 25.00 | - | 25.00 | 0.924556213 | 23.11 |
| 2.5 | 25.00 | - | 25.00 | 0.906601956 | 22.67 |
| 3 | 25.00 | - | 25.00 | 0.888996359 | 22.22 |
| 3.5 | 25.00 | - | 25.00 | 0.87173265 | 21.79 |
| 4 | 25.00 | - | 25.00 | 0.854804191 | 21.37 |
| 4.5 | 25.00 | - | 25.00 | 0.838204471 | 20.96 |
| 5 | 25.00 | - | 25.00 | 0.821927107 | 20.55 |
| 5.5 | 25.00 | - | 25.00 | 0.805965838 | 20.15 |
| 6 | 25.00 | - | 25.00 | 0.790314526 | 19.76 |
| 6.5 | 25.00 | - | 25.00 | 0.774967152 | 19.37 |
| 7 | 25.00 | - | 25.00 | 0.759917813 | 19.00 |
| 7.5 | 25.00 | - | 25.00 | 0.745160723 | 18.63 |
| 8 | 25.00 | - | 25.00 | 0.730690205 | 18.27 |
| 8.5 | 25.00 | - | 25.00 | 0.716500695 | 17.91 |
| 9 | 25.00 | - | 25.00 | 0.702586736 | 17.56 |
| 9.5 | 25.00 | - | 25.00 | 0.688942976 | 17.22 |
| 10 | 25.00 | 1,000.00 | 1,025.00 | 0.675564169 | 692.45 |
| Total | 1085.12 |
Hence X= Price of bond - Face value = 1085.12-1000=85.12
Value of bond if YTM is 6% is given as
| Time | Coupon Interest | Principal | Total cash flow | Discounting rate at 6% | Discounted Cashflow |
| 5% of 1000*6/12 | |||||
| N in 6 Months | A | B | C=A+B | D=1/(1+6%)^N | E= C*D |
| 0.5 | 25.00 | - | 25.00 | 0.971285862 | 24.28 |
| 1 | 25.00 | - | 25.00 | 0.943396226 | 23.58 |
| 1.5 | 25.00 | - | 25.00 | 0.916307417 | 22.91 |
| 2 | 25.00 | - | 25.00 | 0.88999644 | 22.25 |
| 2.5 | 25.00 | - | 25.00 | 0.86444096 | 21.61 |
| 3 | 25.00 | - | 25.00 | 0.839619283 | 20.99 |
| 3.5 | 25.00 | - | 25.00 | 0.815510339 | 20.39 |
| 4 | 25.00 | - | 25.00 | 0.792093663 | 19.80 |
| 4.5 | 25.00 | - | 25.00 | 0.769349377 | 19.23 |
| 5 | 25.00 | - | 25.00 | 0.747258173 | 18.68 |
| 5.5 | 25.00 |
 jeff jeffy answered 2 years agoRelated Solutions1) A 9-year bond with a face value of 1000 dollars is redeemable at twice par...1) A 9-year bond with a face value of 1000 dollars is redeemable
at twice par and earns interest at 10 percent convertible
semiannually. If the yield rate is 7.5 percent convertible
semiannually, find the book value two months after the payment of
the 13th coupon. (Recall that we use simple interest for points in
time between coupon payments.)
2) Suppose that a 12-year bond with a face value of 2500 dollars
is redeemable at par and pays semiannual coupons...
A $1000 bond, redeemable at par, with annual coupons at 10% is purchased for $1050. If...A $1000 bond, redeemable at par, with annual coupons at 10% is
purchased for $1050. If the write-down in the book value is $20 at
the end of the 1st year, what is the write-down at the end of the
4th year
Mr. Simpson buys a $1000 bond paying bond interest at j2= 6.5% and redeemable at par...Mr. Simpson buys a $1000 bond paying bond interest at j2= 6.5%
and redeemable at par in 20 years. He desires a yield rate of j4=
7%. (a) How much did he pay for the bond? (b) After exactly 5 years
he sells the bond. Interest rates have dropped and the bond is sold
to a buyer to yield at j1 = 5%. Find sale price. (other answer here
is not correct)
Two 1000 dollar face value bonds are both redeemable at par, with the first having a...Two 1000 dollar face value bonds are both redeemable at par,
with the first having a redemption date 3 years prior to the
redemption date of the second. Both are bought to yield 11.6
percent convertible semiannually. The first bond sells for 773.3
dollars and pays coupons at 7.9 percent convertible semiannually.
The second bond pays coupons at 5.2 percent per half year. What is
the price of the second bond?
You are given the following information on a bond. (a) Par value is $1000. (b) Redemption...You are given the following information on a bond.
(a) Par value is $1000.
(b) Redemption value is $1000.
(c) Coupon rate is 12%, convertible semiannually.
(d) The bond is priced to yield 10%, convertible
semiannually.
The bond has a term of n years. If the term of the bond is
doubled, the price will increase by 50. Calculate the price of the
n-year bond. ANS IS 1100.
Please calculate it with specific math formula steps instead of
using...
12. A 11-year bond with a face value of $5000 is redeemable at par and earns...12. A 11-year bond with a face value of $5000 is redeemable at
par and earns interest at 10.3% convertible semiannually. If the
yield rate is 7% convertible semiannually, find the book value 2
months before the payment of the 9th coupon. (Use simple interest
for the time between coupon payments.)
Value = $ (3 decimal place)
The importance of knowing the terms of bond issues, especially those relating to redemption, cannot be...The importance of knowing the terms of bond issues, especially
those relating to redemption, cannot be overemphasized. Yet there
have appeared numerous instances of investors, professional and
others, who acknowledge that they don’t read the documentation. For
example, in an article published in the New York Times, the
following statements were attributed to some stockbrokers: “But
brokers in the field say they often don’t spend much time reading
these [official] statements,” “I can be honest and say I never look...
The importance of knowing the terms of bond issues, especially those relating to redemption, cannot be...The importance of knowing the terms of bond issues, especially
those relating to redemption, cannot be overemphasized. Yet there
have appeared numerous instances of investors, professional and
others, who acknowledge that they don’t read the documentation. For
example, in an article published in the New York Times, the
following statements were attributed to some stockbrokers: “But
brokers in the field say they often don’t spend much time reading
these [official] statements,” “I can be honest and say I never look...
The importance of knowing the terms of bond issues, especially those relating to redemption, cannot be...The importance of knowing the terms of bond issues, especially
those relating to redemption, cannot be overemphasized. Yet there
have appeared numerous instances of investors, professional and
others, who acknowledge that they don’t read the documentation. For
example, in an article published in the New York Times, the
following statements were attributed to some stockbrokers: “But
brokers in the field say they often don’t spend much time reading
these [official] statements,” “I can be honest and say I never look...
(1 pt) A 12-year bond with a face value of 5000 dollars is redeemable at par...(1 pt) A 12-year bond with a face value of 5000 dollars is
redeemable at par and earns interest at 10.3 percent convertible
semiannually. If the yield rate is 6.9 percent convertible
semiannually, find the book value 2 months before the payment of
the 9th coupon.
Answer = dollars.
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|