Disney has just issued a 10-year bond to finance its digital strategy. The face value of...

Disney has just issued a 10-year bond to finance its digital strategy. The face value of the bond is 1,000$. The bond is based in USA and pays coupon semi-annually; being the annualized coupon yield 2%. The current interest rate for this bond is 0.95% in semi-annual terms.

Please calculate:

PV of the bond
If the bond is quoted in the market at 1,012$, will you recommend the purchase?
Is the bond a discount, par or premium bond?
If you expect the annual interest rates to fall by 0.5%, what would you recommend doing?

Expert Solution

PV of the bond is $1009.07.

If the bond is quoted in the market at $1,012, you will not recommend the purchase as this bond is priced higher than it's actual price which is $1009.07 (The bond is over-valued).

If the coupon rate is higher than interest rate , the price of the bond will be higher than its face value. Hence, this bond is premium bond.

If you expect the annual interest rates to fall by 0.5%, the price of the bond will be $1055.81.

If interest rate fall by 0.5%, price of the bond will be higher than market price of $1012. Hence, you will recommend to purchase this bond.

jeff jeffy answered 2 years ago

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