Question

a. Suppose you structured a bond deal for Kanye West that paid him $20 million upfront, with future royalties and streaming revenues from his past albums going towards payments to bondholders. Each bond has a face value of $1,000 and a coupon rate of 6.6% with semi-annual coupons. If the bonds have 12 years remaining until maturity and the current yield to maturity is 8.6%, how much is the bond worth? Round to the nearest cent.

b.A Japanese government bond with a $1,000 face value has a 1.32% annual coupon rate. The bond matures in 9 years. The current YTM on the bond is -0.8% (negative!). What is this bond worth? Round to the nearest cent.

c.A Tesla coupon bond with a face value of $1,000 has a coupon rate of 5% with annual coupons and it will mature in 5 years. If it is currently trading at $813.5, what is its yield-to-maturity? Round to the tenth of a percent (e.g., 4.32% = 4.3) ​[Hint: Use Excel's "rate" function as explained in the text. Make sure you set the cell to show decimal places.]

Answer 1

Answer : (a.) Calculation of Value of Bond :

Price of Bond can be calculated by using PV function of Excel :

Using Financial Calculator

=PV(rate,nper,pmt,fv)

where rate is yield to maturity = 8.6% / 2 = 4.3%(Divided by 2 as coupons are paid semiannually )

nper is the number of Payments i.e 12 * 2 = 24 (Multiplied by 2 as coupons are paid Semiannually)

pmt is the coupon payment i.e 1000 * 6.6% = 66 / 2 = 33 (Divided by 2 as coupons are paid semiannually )

fv is the face value i.e 1000

=PV(4.3%,24,-33,-1000)

on Solving

Price of Bond is $852.11

(b.) Calculation of Price of Bond

Current Market price can be calculated using PV function of Excel

=PV(rate,nper,pmt,fv)

where rate is yield to maturity i.e -0.8%

nper is the years to maturity i.e 9

pmt is coupon payment i.e 1000 * 1.32% = 13.2

fv is the face value i.e 1000

=PV(-0.8%,9,-13.2,-1000)

Current Bond Price is 1198.66

(c.) Calculation of Yield to Maturity :

Yield to maturity can be calculated using Rate Function of Excel :

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years to maturity i.e 5

pmt is Interest payment i.e 1000 * 5% =50

pv is Current Market Price

= - 813.5

Note : pv should be taken as negative.

fv is face value i.e 1000

=RATE(5,50,-813.5,1000)

therefore ,Yield to maturity is 9.9%