Question 4 1 pts Consider a 10-year, 6 percent annual coupon bond with a require
ID: 2812576 • Letter: Q
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Question 4 1 pts Consider a 10-year, 6 percent annual coupon bond with a required return of 4 percent. The bond has a face value of $1,000. Which of the following is correct? Round your calculations/answers to two decimals. I. The price of the bond is 1,162.22 Il. If interest rates decline to 3 percent, the price of the bond would be 1,255.91. II. If interest rates decline to 3 percent, the percentage change in price would be 8.06 percent. O Ionly O Il only O I and Il only O I and Illonly O I. Il, and IlI Question 5 1 ptsExplanation / Answer
ANSWER = 1 Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $ 1,000.00 Annual Coupon % 6.00% Annual Coupon Amount $ 60.00 Step 2: Calculate number of years to Maturity Number of years to maturity = 10 years Step 3 : Yield to Maturity = 4%, So discount rate = 4% PVF = 1 / Discount rate = 1/ 1.04 Result of above will again divide by 1.04 , repeat this till last period Option 1= Life of the bond is 10 years CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE Years Interest Amount PVF @ 4% PresentValue 1 Interest $ 60.00 0.9615 $ 57.69 2 Interest $ 60.00 0.9246 $ 55.47 3 Interest $ 60.00 0.8890 $ 53.34 4 Interest $ 60.00 0.8548 $ 51.29 5 Interest $ 60.00 0.8219 $ 49.32 6 Interest $ 60.00 0.7903 $ 47.42 7 Interest $ 60.00 0.7599 $ 45.60 8 Interest $ 60.00 0.7307 $ 43.84 9 Interest $ 60.00 0.7026 $ 42.16 10 Interest $ 60.00 0.6756 $ 40.53 10 Bond Value $ 1,000.00 0.6756 $ 675.56 Total $ 1,162.22 Current price of the Bond = $ 1,162.22 ANSWER = II IF THE INTEREST RATE IS DECLINED TO 3% Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $ 1,000.00 Annual Coupon % 6.00% Annual Coupon Amount $ 60.00 Step 2: Calculate number of years to Maturity Number of years to maturity = 10 years Step 3 : Yield to Maturity = 3%, So discount rate = 3% PVF = 1 / Discount rate = 1/ 1.03 Result of above will again divide by 1.03 , repeat this till last period Option 1= Life of the bond is 10 years CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE Years Interest Amount PVF @ 3% PresentValue 1 Interest $ 60.00 0.9709 $ 58.25 2 Interest $ 60.00 0.9426 $ 56.56 3 Interest $ 60.00 0.9151 $ 54.91 4 Interest $ 60.00 0.8885 $ 53.31 5 Interest $ 60.00 0.8626 $ 51.76 6 Interest $ 60.00 0.8375 $ 50.25 7 Interest $ 60.00 0.8131 $ 48.79 8 Interest $ 60.00 0.7894 $ 47.36 9 Interest $ 60.00 0.7664 $ 45.99 10 Interest $ 60.00 0.7441 $ 44.65 10 Bond Value $ 1,000.00 0.7441 $ 744.09 Total $ 1,255.91 Current price of the Bond = $ 1,255.91 Answer = III) Change in % Price of the Bonds = ($ 1,255.91 - $ 1,162.22) / $ 1162.22 Change in % Price of the Bonds = "$ 93.69 / $1162.22 "$ 93.69 / $1162.22 Change in % Price of the Bonds = 0.806 Change in % Price of the Bonds = 8.06% Answer = Option 5 = I,II an III
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