Question

On February 1, 2009, Rogers, Inc. sold a $500 million bond issue to finance the purchase of a new manufacturing facility. These bonds were issued in $1,000 denominations with a maturity date of February 1, 2029. The bonds have a coupon rate of 4.00% with interest paid semiannually.

Required:

1. Determine the value today, February 1, 2019 of one of these bonds to an investor who requires a 8 percent return on these bonds. Why is the value today different from the par value?
2. Assume that the bonds are selling for $875. Determine the current yield and the yield-to-maturity. Explain what these terms mean.
3. As discussed in class, explain which layers/textures of risk would be inherent for a 10-year Treasury bond, 10-year Rogers’ bond and Rogers’ common stock.

Answer 1

1-	present value of bond at	Using present value function in MS excel	pv(rate,nper,pmt,fv,type) rate = 8/2 = 4% nper = 10*2 = 20 pmt = 20 fv =1000 type =0	PV(4%,20,20,1000,0)	($728.19)
	this difference is due to change in market rate of return and the coupon rate offered on bonds
2-	current yield	coupon payment/market price	40/875	4.57%
	ytm - semiannual = using rate function in ms excel	rate(nper,pmt,pv,fv,type) nper = 120 pmt = 20 pv =-857 fv = 1000 type =0	2.96%	2.96%
	ytm annual	2.96*2	5.92
	current yield refers to percentage return earned in the form of coupon payment on current market price
	YTM refers to annual rate of return earned from the date of purchase to final date of matuirty
3-	10 years treasury bonds	Interest rate risk, inflation risk and maturity risk
	10 years Rogers bond	default risk, interest rate risk, inflation risk, maturity risk, liquidity risk
	Rogers common stock	default risk, interest rate risk, inflation risk, maturity risk, liquidity risk