Predicting Bond Values. Bulldog Bank has just purchased a bond with 10 years remaining to maturity,...

Predicting Bond Values. Bulldog Bank has just purchased a bond with 10 years remaining to maturity, and a coupon rate of 3 percent. It expects the YTM on these bonds to be 7 percent one year from now. The bond makes semi-annual payments.
a. At what price could Bulldog Bank sell these bonds for one year from now?

Expert Solution

Selling Price of the Bond one year from now

The Selling Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $1,000

Semi-annual Coupon Amount = $15 [$1,000 x 3% x ½]

Yield to Maturity = 3.50% [7% x ½]

Maturity Period = 18 Years [(10 Years – 1 Year) x 2]

The Selling Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $120[PVIFA 12.36%, 12 Years] + $1,000[PVIF 12.36%, 12 Years]

= [$15 x 13.18968] + [$1,000 x 0.53836]

= $197.85 + $538.36

= $736.21

“Therefore, the Bulldog Bank sell these bonds for $736.21”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

--The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

jeff jeffy answered 1 year ago

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