Question

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.

Answer 1

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