Determine the current market prices of the following $1,000 bonds if the compara

Question

Determine the current market prices of the following $1,000 bonds if the comparable rate is 10% and answer the following questions. At the comparable rate 10 percent, the present value of the 1000 bond value of the bond is XY 5.25 % (interest paid annually) for 20 years AB 14% (interest paid annually) for 20 years A. Which bond has a current yield that exceeds the yield to maturity. B. Which bond may you expect to be called? Why? C. If CD, Inc., has a bond with a 5.25 % coupon and a maturity of 20 years but which was lower rated, hat would be its price relative to the XY inc., bond? Explain.

Explanation / Answer

At the comparable rate (10%), the present value of the $1000 maturity value of the bond is 1000*(1.10^-20) = 148.6436 Each bond makes an annual payment of the bond rate times the face value. For bond XY, that is $52.50, For bond AB, that is $140. At the comparable rate (10%), the present value of the series of payments is the payment value times (1 - (1.10^-20))/.1 = 8.5135637 Your 5.25% bond (XY) has a value of 148.6436 + 52.50*8.5135637 = 148.6436 + 446.9621 = 595.6057 ˜ $595.61 Your 14% bond (AB) has a value of 148.6436 + 140*8.5135637 = 148.6436 + 1191.8989 = 1340.5425 ˜ $1340.54

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