Question

A Ford Motor Co. coupon bond has a coupon rate of 6.9​%, and pays annual coupons. The next coupon is due tomorrow and the bond matures 37 years from tomorrow. The yield on the bond issue is 6.2​%. At what price should this bond trade​ today, assuming a face value of $1,000​?

With celebrity​ bonds, celebrities raise money by issuing bonds to investors. The royalties from sales of the music are used to pay interest and principal on the bonds. In April of​ 2009, EMI announced that it intended to securitize its back catalogue with the help of the Bank of Scotland. The bond was issued with a coupon rate of 6.7​% and will mature on this day 33 years from now. The yield on the bond issue is currently 6.15​%. At what price should this bond trade​ today, assuming a face value of ​$1,000 and annual​ coupons?

If the nominal rate of interest is 12.38% and the real rate of interest is 7.68%​, what is the expected rate of​ inflation?

Answer 1

Ford Motor:

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (6.2%,37 periods)	$                         69.00	14.38722	$                992.72
Present value of bond face amount -Present value (6.2%,37 periods)	$                    1,000.00	0.10799	$                107.99
Bond price			$             1,100.71

Bond price is $1,100.71

Celebrity:

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (6.15%,33 periods)	$                         67.00	13.99153	$                937.43
Present value of bond face amount -Present value (6.15%,33 periods)	$                    1,000.00	0.13952	$                139.52
Bond price			$             1,076.95

Bond price is $1,076.95

Expected inflation =(1+12.38%) / (1+7.68%) -1 = 4.3648%