Question

A 30-year corporate bond has a face value of $1,000 and a coupon rate of 6% paid annually. At the end of year 12 the Yield to Maturity is 8%. a. How much money will the holder of the bond receive at the end of year 30? b. What is the bond’s price at the end of year 12? c. What will the bond’s interest payment be at the end of year 12? d. If the Yield to Maturity later decreases from 8% to 5%, will the bond sell at a discount, premium, or par value?

Answer 1

a. How much money will the holder of the bond receive at the end of year 30

Receipt = interest payment + face value return = $60 + $1,000 = $1,060

b

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (8%,18 periods)	$                         60.00	9.37189	$                562.31
Present value of bond face amount -Present value (8%,18 periods)	$                    1,000.00	0.25025	$                250.25
Bond price			$                812.56
Face value			$             1,000.00
Premium/(Discount)			$              (187.44)

Price is $812.56

c

Interest payment per year every year = $60

d

Par ( as coupon rate is greater than yield to maturity)

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