13) Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bond

Question

13) Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 4.5% (10 points). a. b. c. d. e. What is the current price of the bonds, given that they now have 19 years to maturity? What is the bond expected current yield? What is the bond expected capital gain yield? What is the expected price one year from today if the market interest rate does not change? What is the expected price four years from today if the market interest rate does not change?

Explanation / Answer

Ans a) Price of bond will given by following formula:

= C* ( 1 - (1 + r) ^(-n))/r + Par value/(1+r)^n

where n is number of years

r is YTM

C iscoupon

Par value is redemption value

using above formula bond price = 75 * (1 - 1.045^(-19))/.045 + 1000/(1.045)^19

= 944.5 + 433.3

= $1377.8

Ans b) Current Yield = Coupon / bond price

= 75/1377.8 = 5.44%

Ans c) Capital gain yield = (1377.8 - 1000)/1000

= 37.78%

Ans d) We will use formula in equation 1 only change will be no of years will be equal to 18.

Price of bond one year from today = $1364.8

Ans e) Here also will use same formula only change will be number of years now equal to 15

Price of bond one year from today = 75* (1 - 1.045^(-15))/.045 + 1000/(1.045)^15

= $1322.19

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