With celebrity bonds, celebrities raise money by issuing bonds to investors. The

Question

With celebrity bonds, celebrities raise money by issuing bonds to investors. The royalties from the sales of the music are used to pay interest and principal on the bonds. In April of 2009, EMI announced that it intended to securitize its back catalogue with the help of the bank of Scotland. The bond was issued with a coupon rate of 6.75% and will mature on this day 34 years from now. The yield on the bond issue is currently 6.05%. At what price should this bond trade today, assuming a face value of $1,000 and annual coupons?

Explanation / Answer

Coupon rate 6.75% Duration 34 Years YTM 6.05% Face value of bonds 1000 Price at which at which the bond would be traded can be arrived at by calculating the present value of : - 1. Lumpsome cash flow ie PV of face value 2. PV of cash flows from the investments PV of face value at YTM of 6.05% = Face Value 1000 Discount factor at 34 years at 6.05% 0.135717897 PV   of investment 135.7178975 Coupon amount offered 67.5 ( 1000 * 6.75%) Present value of cash flows from interest inflows of be calculated 964.2816846 By adding the two cash flows we get current market proce of the bond 1099.999582 ( 135.72 +964.28) PV of face value at YTM of 6.05% = 1.0605 Years Discount factor Interest Present value 1 0.942951438 ( 1/ 1.0605 ) 67.5 63.64922 2 0.889157414 ( .9426/1.0605 ) 67.5 60.01813 3 0.838432263 and so on till 34 years 67.5 56.59418 4 0.790600908 67.5 53.36556 5 0.745498263 67.5 50.32113 6 0.702968659 67.5 47.45038 7 0.662865308 67.5 44.74341 8 0.625049795 67.5 42.19086 9 0.589391603 67.5 39.78393 10 0.55576766 67.5 37.51432 11 0.524061914 67.5 35.37418 12 0.494164935 67.5 33.35613 13 0.465973536 67.5 31.45321 14 0.439390416 67.5 29.65885 15 0.414323825 67.5 27.96686 16 0.390687246 67.5 26.37139 17 0.368399101 67.5 24.86694 18 0.347382462 67.5 23.44832 19 0.327564792 67.5 22.11062 20 0.308877692 67.5 20.84924 21 0.291256663 67.5 19.65982 22 0.27464089 67.5 18.53826 23 0.258973022 67.5 17.48068 24 0.244198983 67.5 16.48343 25 0.230267782 67.5 15.54308 26 0.217131337 67.5 14.65637 27 0.204744306 67.5 13.82024 28 0.193063938 67.5 13.03182 29 0.182049918 67.5 12.28837 30 0.171664232 67.5 11.58734 31 0.161871034 67.5 10.92629 32 0.152636525 67.5 10.30297 33 0.14392883 67.5 9.715196 34 0.135717897 67.5 9.160958 Have tried to explain the fundamental behind the calculation

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