Question

URGENT

.The following data are available for a bond.

Face value 3,000
Coupon Rate 12%
Years to Maturity 5
Redemption with 10% premium
Repayable in the 1st year 10%, 2nd year 30%
3rd year 25%, 4th year 25%, 5th year 10%
Yield to maturity         a.12%   b. 10% c. 16%
Calculate the market value of the bond for each
case?

Answer 1

Solution:

Redemption amount is 110% of face value

Redemption amount for

1st year=(3000*10%)*110%=330

2nd year=(3000*30%)*110%=990

3rd year=(3000*25%)*110%=825

4th year=(3000*25%)*110%=825

5th year=(3000*10%)*110%=330

Coupon is calculated at opening balance

Coupon for 1st year=3000*12%=360

Coupon for 2nd year=(3000-300)*12%=324

Coupon for 3rd year=(3000-1200)*12%=216

Coupon for 4th year=(3000-1950)*12%=126

Coupon for 5th year=(3000-2700)*12%=36

Bond Price is the sum of present value of annual coupon and redemption amount.

a)Calculation of bond price,when YTM is 12%

Bond Price=(360+330)/(1+0.12)^1+(324+990)/(1+0.12)^2+(216+825)/(1+0.12)^3+(126+825)/(1+0.12)^4+(36+330)/(1+0.12)^5

=3216.60

b)Calculation of bond price,when YTM is 10%

Bond Price=(360+330)/(1+0.10)^1+(324+990)/(1+0.10)^2+(216+825)/(1+0.10)^3+(126+825)/(1+0.10)^4+(36+330)/(1+0.10)^5

=3372.14

c)Calculation of bond price,when YTM is 16%

Bond Price=(360+330)/(1+0.16)^1+(324+990)/(1+0.16)^2+(216+825)/(1+0.16)^3+(126+825)/(1+0.16)^4+(36+330)/(1+0.16)^5

=2937.75