please show your solutions Use excel in all of the problems. 1) Dewey Cheetham &

Question

please show your solutions

Use excel in all of the problems. 1) Dewey Cheetham & Howe Accounting firm is considering the purchase of a $1,000 New Haven Municipal Bond. The stated coupon rate is 5%, paid semi-annually(twice a year). The bond will mature in 20 years. The YTM for similar bonds is 2.5% a) What should the market price of the bond be? b) What is the effective rate? c) What should the market price be if the coupon were paid annually? d) If the current market price of the bond is $1080, find the YTM with the original semi annual coupon. e) What should the market price of the bond be if YTM were 6% annually? f) Explain why an investor would buy a bond at a premium or at a discount. g) What is the Yield to Call if the bond is callable in 10 years at a 12% premium with the original semi-annual coupon?

Explanation / Answer

a) Market Price of Bond = PV

Price of Bond(PV) = PV (rate,nper,pmt,fv)

rate = YTM =2.5% = 1.25 % semi annually

FV= 1000

Semi annual coupons (PMT) = 25 ( 1000*2.5%)

nper= 20* 2= 40

Price of Bond= PV(1.25%,40,25,1000) = $ 1391.59

b) Effective rate = (1+2.5%)^2 - 1 = 5.06%

c) Price of Bond(PV) = PV(2.5%,20,50,1000) = $1389.73

Since rate = 2.5% (YTM) , nper= 20, Coupon(PMT) = 5%*1000= 50

d)

Price(PV) = 1080

Nper = 40(since semi annual)

Coupons = 25(semi annual coupons)

Rate(YTM) = rate(nper,pmt,pv,fv) = rate(40,25,-1080,1000) = 2.2% = 4.4% pa

e)

YTM = 6%

Price of Bond= PV( 6%,20,50,1000) = $ 885.30

f)

A bond investor would normally buy a bond at premium as the bond's stated interest rate is higher than the market interest rate.Some of other reasons include higher yields, greater cash flow and thereby better reinvestment opportunity, reduced changes in prices etc

A bond investor buys at a discount as the the prices fall below the par level the chances of bond appreciating in prices is higher and therby provides an arbitrage opportunity for traders.

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