Please answer 1-5 or do not do any of them. 1.What can be stated for certain, be
ID: 2788157 • Letter: P
Question
Please answer 1-5 or do not do any of them.
1.What can be stated for certain, before performing any calculations on the following bond? Face value $1,000. Coupon rate 9%. Yield 9%.
A)
The bond price equals face value.
B)
The bond will be priced at a premium to face value.
C)
The bond will be priced at a discount to face value.
2.A bond has a par value of 10,000. It matures in 15 years. The bond has a coupon rate of 7%, paid annually. Based on a market rate (yield) of 6%, what is the bond's price?
3. A bond matures in 15 years with a $1,000 face value. The bond has a coupon rate of 12%, but payments are made semi-annually. Based on a yield of 9% in the marketplace, what is the bond's current price?
4. Before performing any calculations, what can be stated with certainty about the following bond? Face value 1,000. Coupon rate 9%. Yield 10%.
a.The bond will trade at a discount to face value.
b.The bond will be priced at a premium to face value.
c.The bond price will equal face value.
5. A bond with semi-annual coupon payments has the following characteristics: Par value of 10,000; coupon rate of 10% (annual); maturity date 30 years; yield of 9%. What is the current price?
A)
The bond price equals face value.
B)
The bond will be priced at a premium to face value.
C)
The bond will be priced at a discount to face value.
2.A bond has a par value of 10,000. It matures in 15 years. The bond has a coupon rate of 7%, paid annually. Based on a market rate (yield) of 6%, what is the bond's price?
3. A bond matures in 15 years with a $1,000 face value. The bond has a coupon rate of 12%, but payments are made semi-annually. Based on a yield of 9% in the marketplace, what is the bond's current price?
4. Before performing any calculations, what can be stated with certainty about the following bond? Face value 1,000. Coupon rate 9%. Yield 10%.
a.The bond will trade at a discount to face value.
b.The bond will be priced at a premium to face value.
c.The bond price will equal face value.
5. A bond with semi-annual coupon payments has the following characteristics: Par value of 10,000; coupon rate of 10% (annual); maturity date 30 years; yield of 9%. What is the current price?
Explanation / Answer
Question 1 - Coupon rate = 9%
Yield = 9%
If coupon rate and yield are equal then bond will trade at par value
Therefore, answer is option 'A' i.e. bond prive equals face value
Question 2- Par value of bond = $10,000
Maturity = 15 years
Coupon rate = 7%
Therefore coupon = 0.07*10,000 = 700
Yield = 6%
Price of bond = present value of all repayments i.e. coupon and principal
Price = Coupon1/(1+r)1 + Coupon2/(1+r)2 + .............................+ Coupon14/(1+r)14 + (Coupon15 + principal repayment)/(1+r)15, where r is yield and Couponn is coupon payment at n year
We have added principal repayment as in the end bond will repay principal
Price = 700/(1.06)1 + 700/(1.06)2 + ..................... + 700/(1.06)14 + (700+10000)/(1.06)15
Price = 10971.22
Question 3- Par value of bond = $1,000
Maturity = 15 years
Coupon rate = 12%
Therefore coupon = 0.12*1,000 = 120
Yield = 9%
Therefore semi annual yield = (1+yield)1/2 - 1 = (1+0.09)^(1/2) - 1 = 4.40%
Semi annual coupon = 120/2 = 60
Number of periods = 15*2 = 30 half years
Price of bond = present value of all repayments i.e. coupon and principal
Price = Coupon1/(1+r)1 + Coupon2/(1+r)2 + .............................+ Coupon29/(1+r)29 + (Coupon30 + principal repayment)/(1+r)30, where r is yield and Couponn is coupon payment at n period
We have added principal repayment as in the end bond will repay principal
Price = 60/(1.044)1 + 60/(1.044)2 + ..................... + 60/(1.044)29 + (60+1000)/(1.044)30
Price = 1263.72
Question - 4
Coupon rate = 9%
Yield = 10%
If yield is more than coupon rate it means lendors are demanding more return than bond is paying so bond will trade at lower price than face value
Therefore answer is option 'a' i.e. bond will trade at discount to face value
Question 5 - Par value of bond = $10,000
Maturity = 30 years
Coupon rate = 10%
Therefore coupon = 0.1*10,000 = 1000
Yield = 9%
Therefore semi annual yield = (1+yield)1/2 - 1 = (1+0.09)^(1/2) - 1 = 4.40%
Semi annual coupon = 1000/2 = 500
Number of periods = 30*2 = 60 half years
Price of bond = present value of all repayments i.e. coupon and principal
Price = Coupon1/(1+r)1 + Coupon2/(1+r)2 + .............................+ Coupon29/(1+r)59 + (Coupon30 + principal repayment)/(1+r)60, where r is yield and Couponn is coupon payment at n period
We have added principal repayment as in the end bond will repay principal
Price = 500/(1.044)1 + 500/(1.044)2 + ..................... + 500/(1.044)59 + (500+10000)/(1.044)60
Price = 11260.68
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