Question

What is the price of the following split coupon bond if comparable yields are 13 percent?

Principal	$2,000
Maturity	12 years
Annual coupon	0% ($0) for years 1 - 3
	11% ($220) for years 4 - 12

Round your answer to two decimal places.

$   

If comparable yields decline to 12 percent, what is the appreciation in the price of the bond? Round your answer to two decimal places.

$

Answer 1

A) Value of bond = Present value of coupon till 12 years - present value of coupon till 3 years (as no coupon is paid) + present value of terminal vaue

Value of bond = (Coupon/Reqd rate)*(1-(1/(1+Reqd rate)^12)) - (coupon/reqd rate)*(1-(1/(1+Reqd rate)^3)) + Terminal value/(1+reqd rate)^12

VB = (220/0.13)*(1-(1/1.13)^12) - (220/0.13)*(1-(1/1.13)^3) + 2000/(1.13)^12

VB = 1692.30(1-(0.884^12)) - 1692.30(1-(0.884^3)) + 2000/11.52

VB = 1692.30(0.7722) - 1692.3(0.309) + 173.611

VB= 1306.90 - 523.24 + 173.611

VB= 957.27

B)

Value of bond = Present value of coupon till 12 years - present value of coupon till 3 years (as no coupon is paid) + present value of terminal vaue

Value of bond = (Coupon/Reqd rate)*(1-(1/(1+Reqd rate)^12)) - (coupon/reqd rate)*(1-(1/(1+Reqd rate)^3)) + Terminal value/(1+reqd rate)^12

VB = (220/0.12)*(1-(1/1.12)^12) - (220/0.12)*(1-(1/1.12)^3) + 2000/(1.12)^12

VB = 1833.33(0.754) - 1833.33(0.290) + 2000/3.89

VB = 1382.33 - 532.16 + 514.14

VB = 1364.31

Appreciation in value of bond = 1364.31 - 957.27 = 407.04