Please solve a,b,c,d. Don’t post excel spreadsheet as the answer. I need the fin
ID: 2656964 • Letter: P
Question
Please solve a,b,c,d. Don’t post excel spreadsheet as the answer. I need the final answers for each please. I need it ASAP 2. A $1,000 bond has a coupon rate of 7 percent and matures after eight years. Interest rates are currently 5 percent. a) What will the price of this bond be if the interest is paid annually? b) What will the price be if investors expect that the bond will be called with no call penalty after two years? What will the price be if investors expect that the bond will be called atter two years and there will be a call penalty of one year's interest? c) di Why are your anwer diet for questions (a).bi and torExplanation / Answer
a) Bond price = Present value of par value of bond + present value of interest payment
= face value / (1+market interest)number of payments + interest [1-(1+market interest)-number of payments] / market interest
=1000 / (1+0.05)8+ ($1000*7%) [1-(1+0.05)-8] / 0.05
=1000 / (1.05)8+ 70[1-(1.05)-8] / 0.05
=1000 / (1.05)8+ 70[1- 1 /(1.05)8] / 0.05
=1000 / 1.477455 + 70[1- 1 /1.477455] / 0.05
= 676.84 + 452.42
= $1129.26
b)Bond price = face value / (1+market interest)number of payments + interest [1-(1+market interest)-number of payments] / market interest
=1000 / (1+0.05)2+ ($1000*7%) [1-(1+0.05)-2] / 0.05
=1000 / (1.05)2+ 70[1-(1.05)-2] / 0.05
=1000 / (1.05)2+ 70[1- 1 /(1.05)2] / 0.05
=1000 / 1.1025 + 70[1- 1 /1.1025] / 0.05
=907.03+ 130.16
= $1037.19
c) Bond price = $1037.19 + [0.05 * $1000]
= $1037.19 + $50
= $1087.19
d) since Time of maturity period has changed for the a and b , so there are chnage of present value (price) of bonds whereas for c, there was a penalty of one year interest along with the price of bond