Stocks & Bonds I. Suppose that in 2009 IBM issues a 10-year bond with a 3% coupo
ID: 2541003 • Letter: S
Question
Stocks & Bonds I. Suppose that in 2009 IBM issues a 10-year bond with a 3% coupon rate and a face value of $1000 (a) What is periodic coupon payment (in dollars)? (b) What would the initial price of the bond have been if the required interest rate for IBM bonds at that time was 3%? (c) Suppose the required interest rate on IBM bonds is now 3.5%. Write down the equation you would need to solve to find the exact price of the bond in 2017, with 4 interest payments remaining. (d) Is the current price of the bond higher or lower than it was in 2015? Why?Explanation / Answer
A. Perodic Coupon Payment = $ 1000 * 3/100
= $ 30 Per Year
B. Intial Price of IBM Bond is $ 1000 Only because the coupon rate and the required rate for IBM Bond at time was same i.e. 3% per annum as coupon rate as well as required rate so there will be no discount or premium on the face value of the bond.
C. Exact Price of the Bond = (Remaining Interest * Total of PV at 3.5%) + $ 1000 * Pv factor of 3.5% for the 4th year
= ($ 30 * 3.67) + $ 1000 * 0.87
= $ 110.2 + $ 870
= 981.63
D. Current Price of the Bond is Lower than it was of in 2015 because the Required rate of interest rate on IBM Bond is higer than the Coupon rate which will lower the price of the IBM Bond because the market provide 3.5% where IBM giving only 3% which lower so the price of bond also be lower.