Question

In: Finance

Part b In Feb’2018, Amazon raised US$3.5bn by issuing 10-year bonds carrying annual coupon of 3.15%....

Part b

In Feb’2018, Amazon raised US$3.5bn by issuing 10-year bonds carrying annual coupon of 3.15%. The face value of the bond is $1000 and the coupon is paid every six months.

i. If the bond yield at the time of issue was 3.5%, what would be the price of the bond at the time of issue?

ii. If the bond yield at the time of issue was 3.0%, what would be the price of the bond at the time of issue?

iii. It is said that the price of a bond is inversely proportional to the prevailing interest rates. Prove this statement by taking the case of the above bond and computing the price of the bond at the above two yields (3.0%, and 3.5%) for different times from maturity. You may compute the bond prices at 5 years, 2 years, 1 year, and at maturity.

iv. What would be the price of the bond immediately before the payment of the final coupon (compute for both bond yields)?

v. What would be the price of the bond immediately after the payment of the final coupon (compute for both bond yields)?

Part c:

Note down price of FaceBook Inc. dated 1st November, and then note down price of FaceBook dated 28th Feb. Calculate holding period return for FaceBook for given time period. Now research internet to get risk-free rate of return, market return and beta for FaceBook. Appropriately refer all information and give reasons for selecting this data. Then calculate value of value of FaceBook using CAPM Model.

Solutions

Expert Solution

Period Amount Receivable
(In Million)
PVF @ 3.5% Present Value @ 3.5% PVF @ 3% Present Value @ 3%
Aug-18 15.750 0.983 15.481 0.985 15.52
Feb-19 15.750 0.966 15.217 0.971 15.29
Aug-19 15.750 0.950 14.958 0.957 15.07
Feb-20 15.750 0.934 14.703 0.943 14.85
Aug-20 15.750 0.918 14.452 0.929 14.63
Feb-21 15.750 0.902 14.206 0.915 14.41
Aug-21 15.750 0.887 13.963 0.902 14.20
Feb-22 15.750 0.871 13.725 0.888 13.99
Aug-22 15.750 0.857 13.491 0.875 13.79
Feb-23 15.750 0.842 13.261 0.863 13.59
Aug-23 15.750 0.828 13.035 0.850 13.39
Feb-24 15.750 0.813 12.813 0.837 13.19
Aug-24 15.750 0.800 12.594 0.825 13.00
Feb-25 15.750 0.786 12.379 0.813 12.81
Aug-25 15.750 0.773 12.168 0.801 12.62
Feb-26 15.750 0.759 11.961 0.789 12.43
Aug-26 15.750 0.746 11.757 0.778 12.25
Feb-27 15.750 0.734 11.556 0.766 12.07
Aug-27 15.750 0.721 11.359 0.755 11.89
Feb-28 1015.750 0.709 720.077 0.744 755.82
Total 973.156 1014.798

(i) The Price of bond at yield of 3.5% = $ 973.156

(ii) The Price of bond at yield of 3.0% = $ 1014.798

(iii) As the Yield of bond decrease from 3.5% to 3.0%, the price of bond increases from 973.156 to 1014.798

Hence, It's proved that price of bond is inversely related to its Yield.

(iv) Price of bond immediately before the final coupon payment

= Interest + Bond Value

= $ 1015.75

(v) Price of bond immediately after the final coupon payment

= Bond Value

= $ 1000


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