Hawk Enterprise issued 10- year bond 3 years ago at a coupon rate of 8.5%. The...

Hawk Enterprise issued 10- year bond 3 years ago at a coupon rate of 8.5%. The bonds make semi-annual payments. If the YTM on these bonds is 6 %, 9.5% and 8.5%, what is the current bond price for this YTM and classify its prices as a discount, premium or par value bond?

Expert Solution

Semi Annual Coupon = Par Value*Coupon Rate/2 = 1000*8.5%/2 = $42.5

10-year Bonds were issued 3-years ago. Therefore, Time left to maturity is 7 years i.e. 14 Coupons.

		6%		9.5%		8.5%
Period	Cash Flow	Discounting Factor [1/(1.03^year)]	PV of Cash Flows (cash flows*discounting factor)	Discounting Factor [1/(1.0475^year)]	PV of Cash Flows (cash flows*discounting factor)	Discounting Factor [1/(1.0425^year)]	PV of Cash Flows (cash flows*discounting factor)
1	42.5	0.970873786	41.26213592	0.954653938	40.57279236	0.959232614	40.76738609
2	42.5	0.942595909	40.06032614	0.911364141	38.732976	0.920127208	39.10540632
3	42.5	0.915141659	38.89352052	0.870037366	36.97658807	0.882616026	37.51118112
4	42.5	0.888487048	37.76069954	0.830584598	35.29984541	0.846634078	35.98194832
5	42.5	0.862608784	36.66087334	0.792920857	33.69913643	0.81211902	34.51505834
6	42.5	0.837484257	35.59308091	0.756965019	32.1710133	0.77901105	33.10796963
7	42.5	0.813091511	34.55638923	0.722639636	30.71218453	0.747252806	31.75824425
8	42.5	0.789409234	33.54989246	0.689870774	29.31950791	0.716789262	30.46354365
9	42.5	0.766416732	32.57271112	0.658587851	27.98998368	0.687567638	29.2216246
10	42.5	0.744093915	31.62399138	0.628723486	26.72074815	0.659537302	28.03033535
11	42.5	0.722421277	30.70290426	0.600213352	25.50906744	0.63264969	26.88761185
12	42.5	0.70137988	29.80864491	0.57299604	24.35233169	0.606858216	25.79147419
13	42.5	0.68095134	28.94043195	0.547012926	23.24804934	0.582118193	24.74002321
14	42.5	0.661117806	28.09750675	0.522208044	22.19384186	0.558386756	23.73143713
14	1000	0.661117806	661.1178058	0.522208044	522.2080437	0.558386756	558.3867559
		Price of the Bond = Sum of PVs	1141.200914	Price of the Bond = Sum of PVs	949.7061099	Price of the Bond = Sum of PVs	1000
			Premium		Discount		Par

When Price is Above Par Value, then it is called Premium Bond,

When Price is Below Par Value, then it is called Discount Bond &

When Price is Equal to Par Value, then it is called Par Value Bond.

jeff jeffy answered 1 year ago

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