Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Mor

Question

Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley at the end of 2012. Assume you are thinking about buying these bonds. Answer the following questions:

1) Assuming interest is paid annually, calculate the values of the bonds if your required rates of return are as follows: Microsoft, 6%; GE Capital, 8%; and Morgan Stanley, 10%, where; Coupon Rate: Microsoft 7.25%, GE capital 4.25%, Morgan St 4.75% ; YTM: Microsoft 30, GE capital 10, Morgan St 5.

2) At the end of 2012, the bonds were selling for the following amounts: a. Microsoft $1,100 b. GE Capital $1,030 c. Morgan Stanley $1,015 What were the expected rates of return for each bond?

3. Identify which bonds are premium bonds and which bonds are discount bonds.

4. How would the value of the bonds change if your required rate of return (1) increased 2 percentage points or (2) decreased 2 percentage points?

5. Should you buy the bonds? Explain.

Explanation / Answer

1 Microsoft $ 1,172.06 =PV(6%,30,1000*-7.25%)+1000/(1+6%)^30 GE Capital $     748.37 =PV(8%,10,1000*-4.25%)+1000/(1+8%)^10 Morgan Stanley $     800.98 =PV(10%,5,1000*-4.75%)+1000/(1+10%)^5 2 Microsoft 6.48% 1100=PV(x%,30,1000*-7.25%)+1000/(1+x%)^30 GE Capital 3.88% 1030=PV(x%,10,1000*-4.25%)+1000/(1+x%)^10 Morgan Stanley 4.40% 1015=PV(x%,5,1000*-4.75%)+1000/(1+x%)^5 3 Microsoft Discount Value of the bond in Q 1 > selling price GE Capital Premium Value of the bond in Q 1

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