To expand its business, the Computer Source Ltd. would like to issue bonds with par value of $1,000

To expand its business, the Computer Source Ltd. would like to issue bonds with par value of $1,000, coupon rate of 10%, and maturity of 10 years from now.
Required:
a) What is the value of the bond if the required rate of return is i) 8%, ii) 10%, and iii) 12%?
b) Name each of these bonds based on values calculated in part a

Solutions

Expert Solution

Face Value of bond = $1000

Annual Coupon Bond = $1000*10%

= $100

No of years to maturity (n) = 10 years

a)- i. Required rate of Return(YTM) = 8%

Calculating the Price of Bond:-

Price = $671.01 + $463.193

Price of Bond = $1134.20

a)- ii. When Required rate of Return(YTM) is same as Coupon rate, The Price of Bond is also same as the Face Value of Bond.

Thus, The Value of Bond is $1000

a)- iii. Required rate of Return(YTM) = 12%

Calculating the Price of Bond:-

Price = $565.02 + $321.973

Price of Bond = $886.99

b) i) Bond when Required rate of Return(YTM) is 8% its Price is higher than that of face value. thus, it is Premium Bond or selling at premium.

ii). Bond when Required rate of Return(YTM) is 10% its Price is same as that of face value. thus, it is Par Bond or selling at par.

iii). Bond when Required rate of Return(YTM) is 12% its Price is lower than that of face value. thus, it is Discount Bond or selling at discount.

jeff jeffy answered 1 year ago

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