Jason Greg is a recent retiree who is interested in investing some of his saving
ID: 2770029 • Letter: J
Question
Jason Greg is a recent retiree who is interested in investing some of his savings in corporate bonds. Listed below are the bonds he is considering adding to his portfolio. Bond A has a 7.5% semiannual coupon, matures in 12 years, and has a $1,000 face value. Bond B has a 10% semiannual coupon, matures in 12 years, and has a $1,000 face value. Bond C has an 11.5% semiannual coupon, matures in 12 years, and has a $1,000 face value. Each bond has a YTM of 10%. a. Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, discount or par. b. Calculate the price of each of these bonds. c. Calculate the current yield for each bond.
Explanation / Answer
a
Bond A-Premium
Bond B-Par
Bond C-Discount
b.
Price of the bond A @ 7.5% Year Cash flow Pv@3.75% PV $ 0.5 50 0.9639 48.19 1 50 0.9290 46.45 1.5 50 0.8954 44.77 2 50 0.8631 43.15 2.5 50 0.8319 41.59 3 50 0.8018 40.09 3.5 50 0.7728 38.64 4 50 0.7449 37.24 4.5 50 0.7180 35.90 5 50 0.6920 34.60 5.5 50 0.6670 33.35 6 50 0.6429 32.14 6.5 50 0.6197 30.98 7 50 0.5973 29.86 7.5 50 0.5757 28.78 8 50 0.5549 27.74 8.5 50 0.5348 26.74 9 50 0.5155 25.77 9.5 50 0.4969 24.84 10 50 0.4789 23.94 10.5 50 0.4616 23.08 11 50 0.4449 22.24 11.5 50 0.4288 21.44 12 50 0.4133 20.67 12 1,000 0.4133 413.32 Price of the bond 1,195.56 Price of the bond B @ 10% Year Cash flow Pv@5% PV $ 0.5 50 0.9524 47.62 1 50 0.9070 45.35 1.5 50 0.8638 43.19 2 50 0.8227 41.14 2.5 50 0.7835 39.18 3 50 0.7462 37.31 3.5 50 0.7107 35.53 4 50 0.6768 33.84 4.5 50 0.6446 32.23 5 50 0.6139 30.70 5.5 50 0.5847 29.23 6 50 0.5568 27.84 6.5 50 0.5303 26.52 7 50 0.5051 25.25 7.5 50 0.4810 24.05 8 50 0.4581 22.91 8.5 50 0.4363 21.81 9 50 0.4155 20.78 9.5 50 0.3957 19.79 10 50 0.3769 18.84 10.5 50 0.3589 17.95 11 50 0.3418 17.09 11.5 50 0.3256 16.28 12 50 0.3101 15.50 12 1,000 0.3101 310.07 Price of the bond 1,000.00 Price of the bond C @ 11.5% Year Cash flow Pv@5.75% PV $ 0.5 50 0.9456 47.28 1 50 0.8942 44.71 1.5 50 0.8456 42.28 2 50 0.7996 39.98 2.5 50 0.7561 37.81 3 50 0.7150 35.75 3.5 50 0.6761 33.81 4 50 0.6394 31.97 4.5 50 0.6046 30.23 5 50 0.5717 28.59 5.5 50 0.5406 27.03 6 50 0.5113 25.56 6.5 50 0.4835 24.17 7 50 0.4572 22.86 7.5 50 0.4323 21.62 8 50 0.4088 20.44 8.5 50 0.3866 19.33 9 50 0.3656 18.28 9.5 50 0.3457 17.28 10 50 0.3269 16.34 10.5 50 0.3091 15.46 11 50 0.2923 14.62 11.5 50 0.2764 13.82 12 50 0.2614 13.07 12 1,000 0.2614 261.38 Price of the bond 903.66Related Questions
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