Bond Valuation Problems Calculate the price that you would be willing to pay for
ID: 2716810 • Letter: B
Question
Bond Valuation Problems
Calculate the price that you would be willing to pay for a bond that pays annual coupon payments and has the following characteristics: (a) Coupon Rate: 5%, (b) Years to Maturity: 20, and (c) The Market Rate of Interest: 6%.
Is the bond from problem 9 selling at: (a) a discount to par, (b) a premium to par, or (c) par value?
Calculate the price that you would be willing to pay for a bond that pays semi-annual coupon payments and has the following characteristics: (a) Coupon Rate: 9%, (b) Years to Maturity: 10, and (c) The Market Rate of Interest: 10%.
Is the bond from problem 11 selling at: (a) a discount to par, (b) a premium to par, or (c) par value?
Calculate the current yield on a bond that has the following characteristics: (a) Coupon Rate: 5%, (b) Price: $1,134, and (c) Market Rate of Interest: 4%.
Explanation / Answer
1. Price of the bond as per excel is given as =pv(rate,nper,pmt,fv)
Rate = 6% =0.06 , nper =20 years, pmt = 5% = 50, FV = 1000 . Price =pv(0.06,20,50,1000) = $885.30
Hence bond is selling at (a) a discount for par
2. Rate =10% = 0.10, nper =10years, pmt =9% =90, FV = 1000
Price = pv(0.10,10,90,1000) = $938.55
Hence bond is selling at (a) a disocunt to par
3. Current viled is given by Annual coupons/ Current bond price
Annual coupon = 50 = 5% of 1000
Current bond price =$1,134
Hence Current yield is 50/1134 =0.04409 = 4.41%