1. LKD Co. has 11 percent coupon bonds with a YTM of 8.7 percent. The current yi
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Question
1. LKD Co. has 11 percent coupon bonds with a YTM of 8.7 percent. The current yield on these bonds is 9.9 percent. How many years do these bonds have left until they mature?
2. Consider a 7.40 percent coupon bond with six years to maturity and a current price of $940.10. Suppose the yield on the bond suddenly increases by 2 percent.
Use duration to estimate the new price of the bond. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Calculate the new bond price. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
1.Use duration to estimate the new price of the bond. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
2.Calculate the new bond price. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
Answer to 1) current yield = interest / current price YTM = (Coupon return + pro-rated discount / n ) / average price Average price = ( Redemption price + purchase price ) / 2 face value 1000 Coupon return 110 current yield 0.099 current price = 110 / 0.099 = 1111.11 purchase price 1111.11 Redemption price 1000.00 Average price = ( 1111.11+1000 )/ 2 = 1055.56 Pro rate discount 1000 - 1111.11 -111.11 YTM = 0.087 YTM = (Coupon return + pro-rated discount / n ) / average price 0.087 = (110 -111.11 / n ) / 1055.56 91.83 = 110 -111.11 / n -18.17 = -111.11 / n N = 6.12 years left to maturity 6.12 Answer to 2) Discounting rate Year 8.72 Cash flow Dsic. Cash flow 0 1.00 -940.10 -940.10 1 0.92 74.00 68.06 2 0.85 74.00 62.61 3 0.78 74.00 57.58 4 0.72 74.00 52.97 5 0.66 74.00 48.72 6 0.61 1074.00 650.35 0.19 Required yield =0.0872 + 0.02 0.1072 Discounting rate Year 10.72 Cash flow Dsic. Cash flow year * disc. Cash flow 0 1.00 -940.10 1 0.90 74.00 66.84 66.83526012 2 0.82 74.00 60.36 120.7284323 3 0.74 74.00 54.52 163.5591117 4 0.67 74.00 49.24 196.9642482 5 0.60 74.00 44.47 222.3675128 6 0.54 1074.00 582.97 3497.832986 858.41 4268.287552 Macaulay duration 4268.28 / 940.1 4.54 new bond price 858.41
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