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The NYS Dormitory Authority issued bonds in 2007 to finance the renovation of a Building Hall....

The NYS Dormitory Authority issued bonds in 2007 to finance the renovation of a Building Hall. The bonds have a coupon of 5.5% and a maturity date of 2026. If the current market interest rate is 4.25%, how much would you be willing to pay for the bond – quoted in conventional bond pricing? Is this a premium or a discount? Why?

Solutions

Expert Solution

Price of the Bond

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

Annual Coupon Amount = $55 [$1,000 x 5.50%]

Annual Yield to Maturity = 4.25%

Maturity Period = 19 Years [2026 – 2007]

Therefore, The Price of the Bond = Present Value of the Coupon Payments + Present Value of the Face Value

= $55[PVIFA 4.25%, 19 Years] + $1,000[PVIF 4.25%, 19 Years]

= [$55 x 12.85938] + [$1,000 x 0.45348]

= $707.26 + $453.48

= $1,160.74

“The Price that would be willing to pay for the Bond is $1,160.74 or it can be expressed as 116.07% of the Par Value”

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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