Question

In: Finance

1. Bond A has the following features: Face value = $1,000, Coupon Rate = 3%, &nbsp

1.
Bond A has the following features:
         Face value = $1,000,
         Coupon Rate = 3%,
         Maturity = 7 years, Yearly coupons
         The market interest rate is 5.68%
What is the current yield for bond A from today to year 1?
Calculate your answer to 2 decimal places (e.g., 5.23)

2.
Bond A has the following features:
         Face value = $1,000,
         Coupon Rate = 9%,
         Maturity = 10 years, Yearly coupons
         The market interest rate is 5.56%
         If interest rates remain at 5.56%, what will the price of bond A be in year 1?

Expert Solution

Part 1:

Bond Price:
It refers to the sum of the present values of all likely coupon payments plus the present value of the par value at maturity. There is inverse relation between Bond price and YTM ( Discount rate ) and Direct relation between Cash flow ( Coupon/ maturity Value ) and bond Price.

Price of Bond = PV of CFs from it.

Year	Cash Flow	PVF/ PVAF @5.68 %	Disc CF
1 - 7	$ 30.00	5.6464	$ 169.39
7	$ 1,000.00	0.6793	$ 679.28
Bond Price			$ 848.68

As Coupon Payments are paid periodically with regular intervals, PVAF is used.
Maturity Value is single payment. Hence PVF is used.

What is PVAF & PVF ???
PVAF = Sum [ PVF(r%, n) ]
PVF = 1 / ( 1 + r)^n
Where r is int rate per Anum
Where n is No. of Years

How to Calculate PVAF using Excel ???
+PV(Rate,NPER,-1)
Rate = Disc rate
Nper = No. of Periods

Current Yield = Coupon Amount / Price Today

= $ 30 / $ 848.68

= 0.0353 I.e 3.53%

Current Yield is 3.53%

Part 2:
Price after 1 Year = PV of future CFs

Year	Cash Flow	PVF/ PVAF @5.56 %	Disc CF
1 - 9	$ 90.00	6.9339	$ 624.05
9	$ 1,000.00	0.6145	$ 614.48
Bond Price			$ 1,238.53

As Coupon Payments are paid periodically with regular intervals, PVAF is used.
Maturity Value is single payment. Hence PVF is used.

What is PVAF & PVF ???
PVAF = Sum [ PVF(r%, n) ]
PVF = 1 / ( 1 + r)^n
Where r is int rate per Anum
Where n is No. of Years

How to Calculate PVAF using Excel ???
+PV(Rate,NPER,-1)
Rate = Disc rate
Nper = No. of Periods

Price of Bind after 1 Year is $ 1238.53

jeff jeffy answered 2 years ago

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