Calculate the current value of each of the bonds shown in the following table an
ID: 2705585 • Letter: C
Question
Calculate the current value of each of the bonds shown in the following table and label whether selling at a premium or discount, all of the bonds pay interest annually. Calculate the yield to maturity for each bond. ( counts as 2 problems)
BOND
PAR VALUE
COUPON INTEREST RATE
YEARS TO MATURITY
REQUIRED
RETURN
A
$1,000
14%
20
12%
B
1,000
8
16
8
C
1,000
12
10
10.
BOND
PAR VALUE
COUPON INTEREST RATE
YEARS TO MATURITY
REQUIRED
RETURN
A
$1,000
14%
20
12%
B
1,000
8
16
8
C
1,000
12
10
10.
Explanation / Answer
Bond A: Par value = FV = 1000, Coupon = 14%. So PMT = 14%*Par = 140
No of periods = nper =20, Rate = 12%
So Bond Price (A) = PV(rate,nper,pmt,fv) = PV(12%,20,140,1000) = $1,149.39
SO Bond is selling at Premium as Coupon is more than ReqdRate of return
YTM = Rate of return = 12%
Bond B: Par value = FV = 1000, Coupon = 8%. So PMT = 8%*Par = 80
No of periods = nper =16, Rate = 8%
So Bond Price (B) = PV(rate,nper,pmt,fv) = PV(8%,16,80,1000) = $1000
SO Bond is selling at Par as Coupon is same as ReqdRate of return
YTM = Rate of return = 8%
Bond C: Par value = FV = 1000, Coupon = 12%. So PMT = 12%*Par = 120
No of periods = nper =10, Rate = 10%
So Bond Price (C) = PV(rate,nper,pmt,fv) = PV(10%,10,120,1000) = $1,122.89
SO Bond is selling at Premium as Coupon is more than ReqdRate of return
YTM = Rate of return = 10%
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