18. Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The nom
ID: 2764989 • Letter: 1
Question
18.
Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The nominal required rate of return on these bonds is currently 10 percent (Kd), and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate?
Question 18 options:
8%
6%
4%
2%
0%
17.
A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The equilibrium price of the bond today will be __________ if the coupon rate is 8%.
Question 17 options:
$922.78
$924.16
$1,075.80
$1,077.20
none of the above
8%
6%
4%
2%
0%
17.
A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The equilibrium price of the bond today will be __________ if the coupon rate is 8%.
Question 17 options:
$922.78
$924.16
$1,075.80
$1,077.20
none of the above
Explanation / Answer
Bond Price = C x [1-{1/(1+i)n}]/i + M/(1+i)n
Bond Price= $768
N= no of periods= 5 years x 2 =10 periods
C=?
i=interest rate =10% p.a or 5 % semi annually i.e 0.05
M=Face value=$1,000
768= c x [1-{1/(1+0.05)10 /0.05+$1,000/(1+0.05)10
768 = C x [1-(1/1.05)10/0.05 +$1,000/(1.05)10
768 = C x [1-1.6289 ]0.05 + 1,000/ 1.6289
768 = c x [1- 0.61391 ]/0.05 +613.91
768 = c x 0.38609 /0.05 +613.91
768= c x 7.72173 +613.91
768-613.91=7.72173c
7.7213c= 154.08675
C= 154.08675 /7.7213
C =19.95494
Annual =19.95 x 2=$40
Coupon rate =40/$1,000= 4%
Bond Price = C x [1-{1/(1+i)n}]/i + M/(1+i)n
Bond Price= ?
N= no of periods= 5 years
C=coupon amount =$1,000 x 8%=80
i=interest rate =10% p.a i.e 0.10
M=Face value=$1,000
= 80 x [1-{1/(1+0.10)5 /0.10+$1,000/(1+0.10)5
= 80 x [1-(1/1.10)5/0.10 +$1,000/(1.10)5
= 80 x [1-1.6105 ]0.10 + 1,000/ 1.6105
= 80 x [1- 0.62092 ]/0.10 +621.92
=80 x 0.37908/0.10 +621.92
= 80 x 3.79079 +621.92
=303.26 +621.92
=$924.18 nearest figure is $924.16
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