XYZ limited had issued bonds with a par value of Rs. 100 and a coupon rate...

XYZ limited had issued bonds with a par value of Rs. 100 and a coupon rate of 12% p.a. The bond has maturity of 30 months and pays quarterly coupons. Calculate the fair price of the bond if the required rate of return by investors is 8%.

Solutions

Expert Solution

Fair Price of Bond Calculation

Step 1: Calculate the coupon payment and number of payments.

Since the payment will be made quarterly,

Coupon amount = 12% of 100 (1/4)

= $3

Number of coupon payments (n) = 10

(because there are 30 months & quarter has 3 months, number of coupon payments = 30/3)

Step 2: Calculate the quarterly required rate of return.

Yearly rate of return = 8%

Quarterly rate of return (r) = 2%

(8% divided by 4)

Step 3: Calculation of fair price of the bond shall be the present value of future payments.

Present Value = Coupon Payment * Present value of Annuity Factor_(r,n) + Par Value * Present Value Factor _(r,n)

= $3 * PVAF_(r,n) + 100 * PVF _(r,n)

= $3 * PVAF_(2%,10) + 100 * PVF _(2%,10)

= $3 * 8.98258 + 100 * 0.8203482

= 26.94774 + 82.03482

= $108.98

Fair Price of the Bond shall be $108.98

Explanatory Notes:

1. PVAF can be calculated by the following formula:

[1 - (1+r) ^-n] / r

where n is the number of coupon payments & r is the required rate of interest

2. PVF can be calculated by the following formula:

1/ (1+r) ⁿ

where n is the number of coupon payments & r is the required rate of interest

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

In December 2010, Alpha Technologies Plc. issued coupon bonds with par value £100. The coupon rate...

In December 2010, Alpha Technologies Plc. issued coupon bonds with par value £100. The coupon rate is 8 percent annually and the bonds will be redeemed at par value in December 2015. What is the price of the bond if the competitive market interest rate is 10 percent? How would your answer change if the coupons were paid semi-annually?

A Rs. 100 par value bond bears a coupon rate of 14% and maturesafter 5...

A Rs. 100 par value bond bears a coupon rate of 14% and matures after 5 years. Interest in payable semi-annually. Compute the value of the bond if the required rate of return is 16%. Also calculate the price change in the bond if yield decreases by 1%. (make necessary assumptions if required)

Devon Limited is a company that has issued corporate bonds with a par value of $100...

Devon Limited is a company that has issued corporate bonds with a par value of $100 and a coupon rate of 11%. The Total Statement of Financial Position value of bonds is $50million. The company’s bonds are currently trading at a price of $103. Interest is payable annually in arrears. The maturity date is in four years time. The company has a target capital structure of 25% debt, 15% redeemable preference shares, 10% non-redeemable preference shares, and 50% in ordinary...

Ezekiel Limited issued a bond with a par value of $ 20,000, coupon rate of 8%...

Ezekiel Limited issued a bond with a par value of $ 20,000, coupon rate of 8% p.a. and a maturity period of 12 years. Create a model showing the interest and principal repayment separately and calculate the value of the bond when the required rate of return is 10% if: Interest is paid annually. Interest is paid semi-annually. What would be the value of the bond when the required rate of return is 7.5% payable semi-annually and with a...

One year ago, XYZ Co. issued 18-year bonds at par. The bonds have a coupon rate...

One year ago, XYZ Co. issued 18-year bonds at par. The bonds have a coupon rate of 5.82 percent, paid semiannually, and a face value of $1,000. Today, the market yield on these bonds is 7.51 percent. What is the percentage change in the bond price over the past year? Answer to two decimals

One year ago, XYZ Co. issued 11-year bonds at par. The bonds have a coupon rate...

One year ago, XYZ Co. issued 11-year bonds at par. The bonds have a coupon rate of 6.29 percent, paid semiannually, and a face value of $1,000. Today, the market yield on these bonds is 7.31 percent. What is the percentage change in the bond price over the past year? Answer to two decimals

Fun-well Limited issued a semi-annual bond with a par value of $ 36,000, coupon rate of...

Fun-well Limited issued a semi-annual bond with a par value of $ 36,000, coupon rate of 8% p.a. and a maturity period of 15 years. Required: Create a model showing the interest and principal repayment separately, and calculate the value of the bond when the required rate of return is 10% if: Interest is paid annually. Interest is paid semi-annually. What would be the value of the bond when the required rate of return is 12%, interest paid semi-annually...

One year ago, ShopFast issued 15-year annual bonds at par. The bonds had a coupon rate...

One year ago, ShopFast issued 15-year annual bonds at par. The bonds had a coupon rate of 6.5 percent and had a face value of $1,000. Today, applicable yield to maturity to ShopFast’s bonds is 7%. What was the change in price in ShopFast’s bonds from last year to today? A) -55.56t B) 51.94 C) -$43.73 D) 58.71 E) The bond price did not change. WallStores needs to raise $2.8 million for expansion. The firm wants to raise this money...

OBJ Inc. issued $1000 par value, 17-year bonds at a coupon rate of 10.8 percent. These...

OBJ Inc. issued $1000 par value, 17-year bonds at a coupon rate of 10.8 percent. These bonds were issued 2 years ago. These bonds currently sell for 97 percent of par value and make semiannual payments. What is the YTM?

ABC Corp. issued 5,000 par value bonds today with 30 years to maturity. The coupon rate...

ABC Corp. issued 5,000 par value bonds today with 30 years to maturity. The coupon rate is 6% and coupons are paid semiannually. The current price of each bond is $890.00. In addition, there are 1,000,000 shares of common stock outstanding with a market price of $22 per share. ABC Corp.’s beta is 1.20, the market risk premium is 10% and the risk free rate is 3%. Assume a tax rate of 30%. Calculate the WACC for ABC Corp.

Subjects