1. Hurricane Corp. recently purchased corporate bonds in the secondary market wi
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Question
1. Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Bullock intends to sell the bonds in two years and expects investors' required rate of return at that time on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?
2. A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for
3. Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is
4. The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is
Explanation / Answer
K = N
BOND PRICE= [(Coupon)/(1 + YTM)^k] + 1000/(1 + YTM)^N
k=1
K = 2
BOND PRICE= [(12*1000/100)/(1 + 14/100)^k] + 1000/(1 + 14/100)^10
k=1
bond price for 1000$ par value = 967.07
bond value for 11 million par value = 11000000*967.07/1000 = 10637734.69
2)
K =Nx2
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^(Nx2)
k=1
K= 5x2
BOND PRICE= [(50)/(1 + 8/200)^k] + 1000/(1 + 8/200)^5x2
k=1
= 1081.19
3 ) bond price elasticity = ((change in price)/original price)/ ((change in rate)/original rate)
= ((1000 - 860)/1000)/((.11 - .13)/.11) = -0.77
4)
bond price elasticity = ((change in price)/original price)/ ((change in rate)/original rate)
= ((900 - 1100)/900)/((.12 - .08)/.12) = -0.66
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