Question

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 by selling 20-year, zero-coupon bonds with a par value of $1,000. The market yield on similar bonds is 6.49 percent. How many bonds must the company sell to raise the money it needs? Assume annual compounding.
A) 9,847 bonds

B) 11,144 bonds C) 12,800 bonds D) 10,508 bonds E) 11,315 bonds

Answer 1

1) Bond valuation is the determination of the fair price of a bond. As with any security or capital investment, the expected value of a bond is the present value of the stream of cash flows it is expected to generate. Hence, the value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate.

On the date of issue, since the yield and coupon was same of 6.5%, the bond would trade at par of 1000

We find the value of bond after year1 using financial calculator:

N = 14

IY = 7

PMT = 65

FV = 1000

Compute PV, we get 956.27

Hence change in price = 1000 - 956.27 = 43.73

Correct option c

It was obvious that the price would come down, as now we expect the bond to give a higher return, with the same cash flow, investors can afford to give a lower price in order to earn higher return

2) In order to find the number of bonds to be issued, we find the issue price of the bond.

Using Financial calculator

N = 20

IY = 6.49

PMT = 0

FV = 1000

Compute PV, we get 284.23

Number of Bonds to be issued = Capital / Issue Price = 2,800,000 / 284.33 = 9847 bonds

Correct option a