1. Rebecca bought a corporate bond with the time to maturity of 6 years, yield t

Question

1. Rebecca bought a corporate bond with the time to maturity of 6 years, yield to maturity of 10%, and face value of $1,000. It pays semiannual coupons and the coupon rate of 8%. (a) Was Rebecca’s purchased bond sold at a premium, discount, or par? (b) Andrew bought a different financial asset (not a bond). It pays him equal annual payments for 6 years at the end of each year. The discount rate for this asset is 15%. If he paid the same amount for this security as Rebecca paid for her bond, how much are Andrew’s annual payments?

2. What is the Present Value of the following stream of cash flows if R=10%?

     0                 1                 2                3                 4                   5 …

                       $1               $2              $3               $4                $5 …(and so on)

(Hint 1: It’s not equal to infinity. Hint 2: This is equivalent to a stream of $1 perpetuities, first one starting its payments in year 1, second one starting its payments in year 2, and so on forever.)

Explanation / Answer

Face Value $1,000 Coupon rate 8% PMT = $1000 x 8% $80 Yield 10% Nper 6 Bonds price (calculated in excel using PV function) $912.89 Rebecca's purchased bond was sold at discount for $ 912.89 . (b) Andrew bought a different financial asset (not a bond). It pays him equal annual payments for 6 years at the end of each year. The discount rate for this asset is 15%. If he paid the same amount for this security as Rebecca paid for her bond, how much are Andrew’s annual payments? Present Value of financial assets $912.89 Rate 15% Nper 6 Annual payments (PMT) calculated in excel using PMT function PMT $241.22 Andrew's Annual Payment is $241.22

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