Please help me with this question. Thank you so much in advance! With interest r

Question

Please help me with this question. Thank you so much in advance!

With interest rates so low, some investors have con sidered replacing bond investments with stable dividend paying stocks. First we’ll look at a bond.

a. ONT 3.5 June/2/2043 is a bond issued by the Provinc e of Ontario. The 3.5% coupon is paid semi-annually on June 2 and December 2 (i.e. $ 1.75 per $100). Set up a column of dates and cash flows and manually discount them by a rate that you can adjust. (Pretend it is June 2 right now so we don’t have to deal with accrued)

b. What discount rate gets you a Present Value close t o the trading price of $106? (Guess and check)

c. Check your answer with the XNPV function. (Put a 0 cash flow for June 2, 2015 to hack the formula).

d. What is the present value of the final $101.75 cash flow (that is 28 years from now)?

Explanation / Answer

Answer:

a)

b) At annual effective discount rate of {(1+0.01585)^2 -1} = 3.195%, the bond value will beclosed to $106

a) Payment is made twice a year No of periods 28*2=56 Let the discount rate be 10% per annum So 5% for semi-annual Periods Coupon-$ Discount factor@5% Discounted value 06-02-2015 0 0 0 12-02-2015 1.75 0.95238 1.66667 06-02-2016 1.75 0.90703 1.58730 12-02-2016 1.75 0.86384 1.51172 06-02-2017 1.75 0.82270 1.43973 12-02-2017 1.75 0.78353 1.37117 06-02-2018 1.75 0.74622 1.30588 12-02-2018 1.75 0.71068 1.24369 06-02-2019 1.75 0.67684 1.18447 12-02-2019 1.75 0.64461 1.12807 06-02-2020 1.75 0.61391 1.07435 12-02-2020 1.75 0.58468 1.02319 06-02-2021 1.75 0.55684 0.97447 12-02-2021 1.75 0.53032 0.92806 06-02-2022 1.75 0.50507 0.88387 12-02-2022 1.75 0.48102 0.84178 06-02-2023 1.75 0.45811 0.80170 12-02-2023 1.75 0.43630 0.76352 06-02-2024 1.75 0.41552 0.72716 12-02-2024 1.75 0.39573 0.69253 06-02-2025 1.75 0.37689 0.65956 12-02-2025 1.75 0.35894 0.62815 06-02-2026 1.75 0.34185 0.59824 12-02-2026 1.75 0.32557 0.56975 06-02-2027 1.75 0.31007 0.54262 12-02-2027 1.75 0.29530 0.51678 06-02-2028 1.75 0.28124 0.49217 12-02-2028 1.75 0.26785 0.46873 06-02-2029 1.75 0.25509 0.44641 12-02-2029 1.75 0.24295 0.42516 06-02-2030 1.75 0.23138 0.40491 12-02-2030 1.75 0.22036 0.38563 06-02-2031 1.75 0.20987 0.36727 12-02-2031 1.75 0.19987 0.34978 06-02-2032 1.75 0.19035 0.33312 12-02-2032 1.75 0.18129 0.31726 06-02-2033 1.75 0.17266 0.30215 12-02-2033 1.75 0.16444 0.28776 06-02-2034 1.75 0.15661 0.27406 12-02-2034 1.75 0.14915 0.26101 06-02-2035 1.75 0.14205 0.24858 12-02-2035 1.75 0.13528 0.23674 06-02-2036 1.75 0.12884 0.22547 12-02-2036 1.75 0.12270 0.21473 06-02-2037 1.75 0.11686 0.20451 12-02-2037 1.75 0.11130 0.19477 06-02-2038 1.75 0.10600 0.18549 12-02-2038 1.75 0.10095 0.17666 06-02-2039 1.75 0.09614 0.16825 12-02-2039 1.75 0.09156 0.16024 06-02-2040 1.75 0.08720 0.15261 12-02-2040 1.75 0.08305 0.14534 06-02-2041 1.75 0.07910 0.13842 12-02-2041 1.75 0.07533 0.13183 06-02-2042 1.75 0.07174 0.12555 12-02-2042 1.75 0.06833 0.11957 06-02-2043 101.75 0.06507 6.62115 PV of bond cashflow 39.22973

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