I need some help with some Finance homework. 1-Steve is looking at a bond that p
ID: 2627636 • Letter: I
Question
I need some help with some Finance homework.
1-Steve is looking at a bond that pays a 5.75% coupon and is currently selling for $1052.50. What is the current yield?
2-Wilson owns a bond with a coupon of 6%. He bought it when the current yield was 7%. The current yield is now 5%. How much did he pay for the bond? What is the bond worth today? If he sold it what would his gain or loss be?
3- Vince has his eye on a bond with a coupon of 3 7/8%. If he wants to earn a current yield of 6% on his investment how much will Vince be willing to pay for this bond
4-Abigail is looking at a zero coupon bond that will pay $5,000 at maturity in 13 years. She will not invest unless she can earn at least 6.5% on her money. What is the most she will pay for the bond
Explanation / Answer
1 Coupon amount = 57.5 Current Market Price = 1052.5 Current Yield = Coupon amount/Current Market Price = 5.463182898 2 Coupon rate = 6% Coupon amount = 60 Current Yield at the time of purchase = 7% 7% = Coupon amount/Current Market Price 7% = 60/Current Market Price Market Price at the time of purchase = 857.1428571 Current Yield = Coupon amount/Current Market Price 5% = 60/Current Market Price Current Market Price = 1200 He should pay $857.14 at the time of purchase Worth of Bond today is $1200 If he sold it today then gain will be = 1200-857.14 = 342.8571429 3 Coupon rate = 4% Coupon amount 38.75 Assuming 1000 Face value Current Yield reqd. = 6% 6% = Coupon amount/Current Market Price 6% = 38.75/Current Market Price Current Market Price = 645.8333333 Therefore,vince will pay $645.833. 4 Amount that will be recd. On maturity = 5000 Reqd. return = 6.50% Therefore, Intrinsic Value of the Bond = P.V. of proceed received on maturity = 5000*PVIF(6.5%,13yr) = 2205.08382