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QUESTION THREE – Bond Valuation A high net-worth individual has invested in a 15-year treasury bond...

QUESTION THREE – Bond Valuation

A high net-worth individual has invested in a 15-year treasury bond with par value of $1,000,000 and a 12% coupon rate. It pays coupon every quarter and the bond just made its twentieth payment. 15-year treasury bonds are currently yielding 13%, 10- year treasury bonds are yielding 10% and, 5-year treasury bonds are yielding 8%.

Required: Calculate the price of the bond and advise the bond holder to sell or hold on to the bond and why?

Solutions

Expert Solution

Par value - $ 1 mn
Period - 15 years
Coupon rate - 12%, payable quarterly
Total periods (15years x 4 quarters) = 60
No. of payments made = 20
No. of periods remaining = 60-20 = 40
Current yield of 15 year treasury bonds = 13%
No of periods = 40
Interest per period = 12%/4 = 3% Interest amt = 1,000,000 * 3.% = 30,000
DF @ 13% per quarter = 13%/4 = 3.25%
Compounding period Cash Flow DF @ 3.25% Cash flow x PV
1 30000 0.969            29,055.69
2 30000 0.938            28,141.10
3 30000 0.909            27,255.31
4 30000 0.880            26,397.39
5 30000 0.852            25,566.48
6 30000 0.825            24,761.72
7 30000 0.799            23,982.30
8 30000 0.774            23,227.41
9 30000 0.750            22,496.28
10 30000 0.726            21,788.16
11 30000 0.703            21,102.34
12 30000 0.681            20,438.10
13 30000 0.660            19,794.77
14 30000 0.639            19,171.69
15 30000 0.619            18,568.22
16 30000 0.599            17,983.75
17 30000 0.581            17,417.68
18 30000 0.562            16,869.42
19 30000 0.545            16,338.42
20 30000 0.527            15,824.14
21 30000 0.511            15,326.04
22 30000 0.495            14,843.62
23 30000 0.479            14,376.39
24 30000 0.464            13,923.87
25 30000 0.450            13,485.58
26 30000 0.435            13,061.10
27 30000 0.422            12,649.97
28 30000 0.408            12,251.79
29 30000 0.396            11,866.14
30 30000 0.383            11,492.63
31 30000 0.371            11,130.88
32 30000 0.359            10,780.51
33 30000 0.348            10,441.17
34 30000 0.337            10,112.52
35 30000 0.326              9,794.20
36 30000 0.316              9,485.91
37 30000 0.306              9,187.32
38 30000 0.297              8,898.13
39 30000 0.287              8,618.05
40 30000 0.278              8,346.78
40 1000000 0.278         278,225.92
Total PV of cashflows
jeff jeffy answered 2 years ago
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