Question

1) A 25-year, $1,000 par value bond has an 8.5 percent annual payment coupon. The bond currently sells at a discount (for $925 exactly). If the YTM doesn't change from its current level, what will the price be five years from now?

a)  $930.11

b) $884.19

c) $977.20

d) $953.36

2) GE's balance sheet as of today is as follows:

• Long-term debt (bonds, at par) $23,500,000
• Preferred stock 2,000,000
• Common stock ($10 par) 10,000,000
• Retained earnings          4,000,000
• Total debt and equity $39,500,000

The bonds have a 7 percent coupon rate, payable semiannually, and a par value of $1,000. They mature in ten years. The YTM is 11 percent. What is the current market value of the GE's debt?

a) $ 7,706,000

b) $18,330,403

c) $17,883,320

d)  $17,436,237

Answer 1

First question: Price in five years is 930.11

Period		Opening balance-Liability	Opening balance-Discount	Interest expense debit	Cash credit	Unamortised discount credit	Book value of bonds
		A	B	C= A* 8.75%	D	E=C-D	F=A+E
	1	925.00	75.00	80.95	80.00	0.95	925.95
	2	925.95	74.05	81.03	80.00	1.03	926.98
	3	926.98	73.02	81.12	80.00	1.12	928.10
	4	928.10	71.90	81.22	80.00	1.22	929.31
	5	929.31	70.69	81.32	80.00	1.32	930.64

At YTM of 8.751% current year price is 925 and amortized at that rate to calculate price in five years.

Second question:

Current price is 17,883,320 calculated as below:

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (5.5%,20 periods)	822,500.0	11.9504	9,829,189.59
Present value of bond face amount -Present value (5.5%,20 periods)	23,500,000	0.3427	8,054,130.64
Bond price			17,883,320.00
Face value			23,500,000.00
Premium/(Discount)			-5,616,680.00
Interest amount:
Face value	23,500,000
Coupon/stated Rate of interest	7.000%
Frequency of payment(once in)	6 months
Interest amount	23500000*0.07*6/12=		822500
Present value calculation:
yield to maturity/Effective rate	11.00%
Effective interest per period(i)	0.11*6/12=		5.500%
Number of periods:
Particulars	Amount
Number of interest payments in a year	2
Years to maturiy	10.0
Number of periods	20