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

Question

Determine the current market prices of the following $1,000 bonds if comparable raste is 10% and answer the following questions.

XY 5.25% (interest paid annually) for 20 years

AB 14% (interest paid annually) for 20 years

1. which bond may you expect to be called?why?

2. if CD, inc., has a bond with a 5.25% coupon and a maturity of 20 years but which was lower rated, what would be its price relative to the XY, Inc., bond?

I've seen this question before on here, but I'm not understanding the provided answers. Please explain as simply as possible so I can get it.

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
= approximately $595.61
Your 14% bond (AB) has a value of
148.6436 + 140*8.5135637 = 148.6436 + 1191.8989 = 1340.5425
= approximately $1340.54

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

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