Question

PART A

What is the price of a bond with the following features?

• Face Value = $1,000
• Coupon Rate = 5% (stated as an ANNUAL rate)
• Semiannual coupon payments
• Maturity = 10 years
• YTM = 3.12% (Stated as an APR)

State your answer to the nearest penny (e.g., 984.25)

PART B

You own a bond with the following features:

              Face value of $1000,

              Coupon rate of 5% (annual)

              8 years to maturity.

The bond is callable after 4 years with the call price of $1,058.

If the market interest rate is 4.17% in 4 years when the bond can be called, if the firm calls the bond, how much will it save or lose by calling the bond?

State your answer to the nearest penny (e.g., 84.25)

If there would be a loss, state your answer as a negative (e.g., -37.51)

Answer 1

Though these two are very different questions. But I still going to solve them. but please dont do that. Ask one question at a time.

A)

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 3.12% / 2 = 0.0156

And n is the no of Compounding periods 10 years * 2 = 20

Coupon 5% / 2 = 0.025

=

= 1160.43

B)

Value of Bond after 3 years =  

Where r is the discounting rate of a compounding period i.e. 4.17%

And n is the no of Compounding periods 4 years

Coupon 5%

=

= 1030

Callable Value = 1058

Since the value of Bond is 1030 and we will have to call back at 1058, there will be loss

There will be a loss = 1058 - 1030 = 28 loss

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