There is a man from an old school that is very conservative and 100% risk-averse

Question

There is a man from an old school that is very conservative and 100% risk-averse, only invest his extra money in bonds of large blue chip U.S. companies like General Motors. He is currently doing research in bond investing to put more of his money to work as the current stock markets is trading at such high valuations With current interest rate at 12%, he just found out that GM bonds has a coupon rate of 15.3% and will reach maturity after 7 years Current 10-year U.S. Treasury risk-free rate = 2.57% He is very much excited about this fixed-income investment opportunity at such high coupon rate. As an educated investor and a neighbor, he comes to you for help with the following questions What will the price of this bond be If the Interest Is paid annually? What s the Current Yield? Please provide your answers in the space below and show your method of calculations.

Explanation / Answer

Coupon rate 15.3%

Assume the face value of bonds = 1000

Coupon amount = 153

Discounting factor = 12%+2.57% i.e 14.57%

Price of the bond = Interest * PVAF ( 14.57%,7years) + 1000*PVF(14.57%,7th year)

=153*4.215+1000*0.386

= 645+386

= 1031

Current yield = Interest + ((face value - price)/n)/( face value + price)/2

= 15.3+((1000-1031)/7)/(1000+1031)/2

= 14.63%

  

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.