Question

In: Finance

A corporate bond offers a 4% coupon rate and has exactly 3 years remaining to maturity. Interest is paid annually. The following rates are from the benchmark spot curve.

2. A corporate bond offers a 4% coupon rate and has exactly 3 years remaining to maturity. Interest is paid annually. The following rates are from the benchmark spot curve.

Time to maturity

Spot Rate

1 Year

4.20%

2 Years

4.40%

3 Years

4.55%

The bond has a Z spread of 180 basis points

What is the value of the bond today? Assume par is 100

Expert Solution

Present Value = Coupon ( 1 + Spot 1 + Z) * 1 +[ Coupon ( 1 + Spot 2 + Z) * 2 ] + [ Coupon + Par Value ( 1 + Spot 3 + Z) * 3 ]

Coupon = Coupon Rate * Par Value

Coupon = 4% * 100

Coupon = 4

Present Value = 4 * (1+ .042 + .018) + 4 * (1 + .044 + .018) * 2 + 104 * (1 + .0455 + .018) * 3

Present Value = (4 * 1.06) + (8 * 1.062) + (312 * 1.0635)

Present Value = 4.24 + 8.496 + 331.812

Present Value = 344.548

jeff jeffy answered 2 years ago

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