Suppose a bond matures in N=15 years, pays C=8.5% coupon semi-annually if held t

Question

Suppose a bond matures in N=15 years, pays C=8.5% coupon semi-annually if held to maturity and has a Face Value of $7500. The market rate currently available on a comparable bond is r=6%. 1) what is the value of the bond if sold today? 2) would you sell at a discount or premium? Why? 3) what is the value of the bond if the market rate currently available on comparatable bonds increased to r=9% 4) would you sell at a discount or premium? Please explain why? 5) what is the value of a $7500 bond if sold today instead the bond pays C=6.5% quarterly if held to maturity and at a market rate of 5%? Suppose a bond matures in N=15 years, pays C=8.5% coupon semi-annually if held to maturity and has a Face Value of $7500. The market rate currently available on a comparable bond is r=6%. 1) what is the value of the bond if sold today? 2) would you sell at a discount or premium? Why? 3) what is the value of the bond if the market rate currently available on comparatable bonds increased to r=9% 4) would you sell at a discount or premium? Please explain why? 5) what is the value of a $7500 bond if sold today instead the bond pays C=6.5% quarterly if held to maturity and at a market rate of 5%? 1) what is the value of the bond if sold today? 2) would you sell at a discount or premium? Why? 3) what is the value of the bond if the market rate currently available on comparatable bonds increased to r=9% 4) would you sell at a discount or premium? Please explain why? 5) what is the value of a $7500 bond if sold today instead the bond pays C=6.5% quarterly if held to maturity and at a market rate of 5%?

Explanation / Answer

1) Value of Bond = PV(rate,nper,pmt,fv) = PV( 6%/2,15*2 , 8.5%*7500, 7500) = $ 9337.54

Note : Rate = YTM= 6% pa = 3% semi annual

Nper= 15 years= 30 periods(since semi annual)

PMT = 8.5%* 7500/2= 637.5/2 = $ 318.75( since semi annual)

Par Value(FV) = 7500

2) As the bond's value is above the par value, it will be sold at premium. The reason for premium pricing is the decrease in interest rate from 8.5% to 6% and value is inversely proportional to YTM of security.

3)

Value of Bond = PV(9%/2,30,637.5,7500) = $ 7194.58

4)

This time the bond will be sold at discount to Par value as the rate has increased and the value of bond is less than par value of bond

5)

Given, FV = $ 7500

Coupon = 6.5%

Quarterly Coupon(PMT) = 6.5%/4* 7500= 121.875

Nper = 15 *4 = 60

YTM =5 % = 1.25% quarterly

Value of Bond = PV(1.25%,60,121.875,7500) = $ 8682.22

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.