Bellingham bonds have an annual coupon rate of 8 percent and a par value of doll

Question

Bellingham bonds have an annual coupon rate of 8 percent and a par value of dollar 1,000 and will mature in 20 years. If you require a return of 7 percent, what price would you be willing to pay for the bond? What happened if you pay was for the bond? What happens if you pay less for the bond> Flora Co.'s bonds, maturing in 7 years, pay 4 percent interest on a dollar 1,000 face value. However, interest is paid semiannually. If your required rate of return is 5 percent, what is the value of the bond? How would your answer change it the interest were paid annually? You own a 20-year, dollar 1,000 par value bond paying 7 percent interest annually. The market price of the bond is dollar 875, and your required rate of return is 10 percent. Compute the bond's expected rate of return. Determine the value of the bond to you, given your required rate of return. Should you sell the bond or continue to own it? Calculate the value of a bond that will mature in 14 years and has a dollar 1,000 face value. The annual coupon interest rate is 5 percent, and the investor's required rate of return is 7 percent.

Explanation / Answer

Question 7-1:

1106.2

Since our required rate is 7% i.e less than the coupon rate 8%, the bond is trading at premium so that yield of the bond exactly matches our required rate of return.If we pay more for the bond the yield to matrity of the bond declined below our expected rate of reurn.If we pay less for the bond , the yield to maturity of the bond will be morethan our epected rate of return.

Question 7-2:

If we pay the interest semi annually, the number of years should be converted to number of periods (a period = half year) i.e7 years = 14 periods and rate of return = 2.5% and coupon = 20 per period

If the interest paid annually

Question 7-3:

Approximate ytm =(70+(1000-875)/20)/(1000+875)/2 = 70+6.25/937.5 =8.13

Value of bond at 8% =

897

Value of bond at 9% =

810

For 1% increase ,the value of bond changes by 87 (897-810) .there fore ,for (897-875)$ 22 the % of change should be

22 = 22/87 =0.25%

there fore ytm = 8.25%(bond's epected rate of return)

Value of bond @ 10%:

Since the bond is over priced, it is better to sell the bond.

Question no 7-4:

Years Particulars Amount PVF @ 7% Value 1 to 20 Coupon 80 10.59 847.2 20 redemption 1000 0.259 259 Value of bond

1106.2

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