Question

In: Finance

A GM and a Ford bond both have 4 years to maturity. GM has a annual...

A GM and a Ford bond both have 4 years to maturity. GM has a annual coupon rate of 0.061, while Ford has a annual coupon rate of 0.06. Both bonds are semiannual and have a face value of $1000.

a.The GM bond trades at 962.35. What is the yield to maturity (YTM)?

b.What is the price of the Ford bond?

Solutions

Expert Solution

a.Face value= Future value= $1,000

Time= 4 years*2= 8 semi-annual periods

Coupon rate= 0.061/2= 0.0305

Coupon payment= 0.0305*1,000= $30.50

Present value= $962.35

The yield to maturity is calculated by entering the below in the financial calculator:

FV= 1,000

PV= -962.35

N= 8

PMT= 30.50

Press the CPT key and I/Y to calculate the yield to maturity.

The value obtained is 3.60% for a semi-annual period and 3.60%*2= 7.20%. for an annual period.

Therefore, the yield to maturity of the GM bond is 7.20% for a year.

b. Face value= Future value= $1,000

Time= 4 years*2= 8 semi-annual periods

Coupon rate= 0.06/2= 0.03

Coupon payment= 0.03*1,000= $30

The price of the Ford bond is calculated by calculating the present value of the bond.

The present value of the Ford bond is calculated by entering the below in a financial calculator:

FV= 1,000

N= 8

PMT= 30

Press the CPT key and PV to calculate the present value.

The value obtained is 1,240.

Therefore, the value of the Ford bond is $1,240.


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