Midland Utilities has an outstanding bond issue that will mature to its $1,000 p

Question

Midland Utilities has an outstanding bond issue that will mature to its $1,000 par value in 15 years. The bond has a coupon rate of 11% and pays interest semiannually.

Part A - Find the value of the bond if the required return is 11%.

Part B - Indicate whether the bond is sold at a: discount, a premium or at its par value.

Part C - Find the value of the bond if the required return is 15%.

Part D - Indicate whether the bond is sold at a: discount, a premium or at its par value.

Part E - Find the value of the bond if the required return is 8%.

Part F - Indicate whether the bond is sold at a: discount, a premium or at its par value.

Explanation / Answer

Coupon Amount => (1000*11%) /2 => 55

time => 15*2 => 30 years

ytm => 11%/2 => 5.5

value of a bond => 55 * pviaf,5.5% @30 years + 1000 * af @ 5.5% of 30th year.

=> 55* 14.53 +1000 * 0.201

=> 1000.15

value of a bond is $1000

PART B

bond is sold at par value becuse market rate and coupon rate are same.

PART C

if yeild si 15% then semi annual yeild => 15/2 => 7.5%

value of a bond => 55 * pviaf,7.5% @30 years + 1000 * af @ 7.5% of 30th year.

=> 55* 11.81 + 1000 * 0.114

value of a bond is => $763.55

PART D

Bond is sold at discount because coupon rate is less than interest rate.

PART E

if yeild is 8% then semiannual is 4%.

value of a bond => 55 * pviaf,4% @30 years + 1000 * af @ 4% of 30th year.

=> 55 * 17.29 + 1000 * 0.308

value of a bond => $ 1258.95

PART F

Bond is sold at premium because coupon rate is higher than interest rate.

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