Question

Bold Corporation issued bonds on April 1,2010 with a 3% coupon for the first 5 years (until 2015), a 3.5% coupon for the next 4 years (until 2019), 4% coupon for the following 5 years (until 2024) and 4.5% coupon for the following 9 years (until 2033) until it matures on April 1, 2033. The interest on these bonds is paid and compounded semi-annually. Original Graph in Years when issued April 1, 2010 You buy the bond on April 1, 2014. Determine the value (price) of a $1000 Bold Corporation bond as of April 1, 2014. The bond yield on this date was 4% and Stock yield was 6%. The bond will be held until maturity. Interest is paid SEMI-ANNUALLY

I have an homework do  in 2 hours please help me understand this problem ASAP. I WILL give you thump up

plzz thank you

Answer 1

At time 4 (2014) bond becomes 3% coupon for 1 year, 3.5% coupon for next 4 years, 4% coupon for next 5 years and 4.5% coupon for next 9 years

Semi annual coupons=Copun rate/2*Par value

For example first coupon is 3%/2*1000=1.5%*1000

Present value of cash flow at time t will be Cash flow at time t/(1+r/2)^t

For example present value of first coupon becomes=1.5%*1000/(1+4%/2)^1=1.5%*1000/1.02

Price of the bond=Present Value of the cash flows

=1.5%*1000/1.02+1.5%*1000/1.02^2+1.75%*1000/1.02^3+1.75%*1000/1.02^4+1.75%*1000/1.02^5+1.75%*1000/1.02^6+1.75%*1000/1.02^7+1.75%*1000/1.02^8+1.75%*1000/1.02^9+1.75%*1000/1.02^10+2%*1000/1.02^11+2%*1000/1.02^12+2%*1000/1.02^13+2%*1000/1.02^14+2%*1000/1.02^15+2%*1000/1.02^16+2%*1000/1.02^17+2%*1000/1.02^18+2%*1000/1.02^19+2%*1000/1.02^20+2.25%*1000/1.02^21+2.25%*1000/1.02^22+2.25%*1000/1.02^23+2.25%*1000/1.02^24+2.25%*1000/1.02^25+2.25%*1000/1.02^26+2.25%*1000/1.02^27+2.25%*1000/1.02^28+2.25%*1000/1.02^29+2.25%*1000/1.02^30+2.25%*1000/1.02^31+2.25%*1000/1.02^32+2.25%*1000/1.02^33+2.25%*1000/1.02^34+2.25%*1000/1.02^35+2.25%*1000/1.02^36+2.25%*1000/1.02^37+2.25%*1000/1.02^38+1000/1.02^38

=997.91