Bonds and Bond Valuation (Chapter 6) What buying and selling of bonds represents
ID: 1174462 • Letter: B
Question
Bonds and Bond Valuation (Chapter 6) What buying and selling of bonds represents Par value: The principal amount that the corporation repays at the bon d's maturity. In our example, $1000 is the par value. Coupon rate: The interest rate for the coupons, ustually ex Coupon: Bond's regular interest payment. Coupon is income to bondho vestors). Coupon- Par value coupon rate Maturity date: The bond's expiration date, on which the corporation m interest payment and repays the principal. YTM (Yield to maturity) or discount rate: The opportunity cost of bond investiment. pressed in annual terms makes the final e.g. annual rates on similar bonds. In this chapter you will be asked to solve for Bond Price, and YTM , Bondprice(Pg) = Parvaluel(1/(1 + r)") + coupon[PVAF] . CurrentYield = Annua!CouponPMT/PB YTM (approximation)(Coupon +(Par Pa)/n)/I4Par +6PB) Solving for the price of a bond (PB) uestion: Eighteen years ago afirm-issued-$1,000-par value bond nith a 6% annual coupon rate and a term to maturity of 30 years. Market interest rates have increased since then and similar bonds today would carry an annual coupon rate of 8%, what would these bonds sell for today if they made (a) annual coupon payments; and (b) semiannual coupon payments?Explanation / Answer
1.
=1000*6%/0.08*(1-1/(1+0.08)^(12*1))+1000/1/(1+0.08)^(12*1)=849.2784397
2.
=1000*(6%/2)/(0.08/2)*(1-1/(1+0.08/2)^(12*2))+1000/(1+0.08/2)^(12*2)=847.5304