Question

Rick bought a 20-year bond when it was issued by Macroflex Corporation 5 years ago (NOTE: the bond was issued 5 years ago. In calculating price today, remember it has only 15 years remaining to maturity). The bond has a $1,000 face value, an annual coupon rate equal to 7 percent and the coupon is paid every six months. If the yield on similar-risk investments is 5 percent,

What is the current market value (price) of the bond?

Suppose interest rate levels rise to the point where such bonds now yield 9 percent. What would be the price of Macroflex bond?

At what price would Macroflex bonds sell if the yield on them was 7 percent?

What do you observe regarding the relationship between interest rate (YTM) bond’s price?

What do you observe regarding the relationship between coupon, YTM and the bond’s price?

Answer 1

According to the given question the solutions as follows :

Solution for part (a) :

The current market value (price) of the bond is,

as we know that the formula for the calculation

Formula : Price=Coupon rate*Par value/yield*(1-1/(1+yield/2)^(2*t))+Par worth/(1+yield/2)^(2*t)

Implimenting the given values into formula

=1000*7%/5%*(1-1/(1+5%/2)^(2*15))+1000/(1+5%/2)^(2*15)

=1209.302926

Solution for part (b).

=1000*7%/9%*(1-1/(1+9%/2)^(2*15))+1000/(1+9%/2)^(2*15)

=837.1111146

Therefore the price of marcoflex bond is 837.1111146.

Solution for part (c).

=1000*7%/7%*(1-1/(1+7%/2)^(15*2))+1000/(1+7%/2)^(2*15)

=1000

Solution for part (d):

In the event that yield to maturity expands, bond value diminishes

Solution for part (e):

In the event that coupon rate is more than yield to maturity, security will sell for more than standard

In the event that coupon rate does not exactly yield to maturity, security will sell for not as much as standard

On the off chance that coupon rate is equivalent to yield to maturity, security will sell for standard