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Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity...

Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity was 20 years, and they have a six percent coupon. Rottweiler used the money to purchase 150 Really Adorable Puppies. The firm hopes to double production of Really Adorable Puppies in the next five to ten years. The company makes all payments on a semiannual basis.
1. ​What is the value of the bond on February 24, 2020, if the interest rate on comparable debt is 6 percent? What is the current yield? What is the yield to maturity?
2. ​What is the value of the bond on February 24, 2020, if the interest on comparable debt is 10 percent? What is the current yield? What is the yield to maturity?
3. ​ What is the value of the bond on February 24, 2020, if the interest on comparable debt is 4 percent? What is the current yield? What is the yield to maturity?
4. ​Draw the time path of value graph (be sure to label all points of interest) of a 6 percent coupon, $1,000 par value bond when interest rates are 4 percent, 6 percent, and 10 percent.

Solutions

Expert Solution

given the bond was issued on feb 24,2019 with a maturity of 20 years and a coupon of 6% semi annual and par value(face value) of $1000.

(1.)On 24 feb 2020;

number of years to maturity=19

coupon rate=6% p.a compounded semi-annually i.e 3% of $1000

=$30

face value=$1000

interest rate on comparable debt=6% p.a i.e 3% semi annually

so value of bond on 24 feb 2020 i.e present value(PV)=PV Of 19 coupons discounted @3% + PV of FV at the end of 19th year discounted back to feb 24,2020 @3%

=

=$1000

since coupon rate i.e 3% = interest rate used to disc i.e 3% the bond trades at par i.e $1000

NOTE:the above calculations can be simplified by using following strokes on a financial calculator

1000=FV

30=PMT

3=I/Y

19=N

CPT -- PV =$1000.

Current yield on the bond=

=6% OF 1000/1000

=60/1000

=.06 OR 6%.

yield to maturity(YTM) can be calculated from the following calculator strokes:

+/-1000=PV

1000=FV

19=N

30=PMT

CPT-- I/Y = 3% semi annual i.e 3*2=6% annual.

hence YTM IS 6%.

jeff jeffy answered 2 years ago
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