Bond Valuation This assignment contains two parts: Part I and Part II. Part I An
ID: 2728428 • Letter: B
Question
Bond Valuation
This assignment contains two parts: Part I and Part II.
Part I
Answer these questions and show your work:
Assume that the company that you selected for the Module 1 SLP has a bond outstanding that matures in 20 years and has a coupon rate of 6.5%. The par value of the bond is $1,000.
If the yield to maturity is 8% and the bond pays interest on an annual basis, what’s the current price of the bond? Is the bond selling for a premium or discount? How can you tell?
If the yield to maturity is 8% but the bond pays interest on a semi-annual basis instead of an annual basis, what’s the current price of the bond? Is it different from the value when using annual compounding? Explain.
Now, assume that the economy enters into a recession and interest rates fall. The bond’s yield to maturity is now 5%. What’s the bond’s new price? How does the price compare with your answer in part a? Why did the bond’s value change?
A bond matures in ten years and is currently selling for $1,125. The bond pay interest annually, has a par value of $1,000, and a yield to maturity of 10.75%. What’s the bond’s current yield?
Explanation / Answer
Current Price of the bond is $853.17
Bond is sold at discount.
Reason: Yield to Maturity of 8% > coupon rate of 6.5%
When Coupon is paid semi-annualy
The current price of the bond = $ 851.27
Yes, it different when coupon is paid paid annualy.
Whene bond’s yield to maturity is 5%, paid annually
The bond’s new price is $1252.03
Since Yield to maturity has been reduced, current price of bond has been increased.
Price is at premium since YTM<Coupon rate and is just opposit to part a
Since the market enters into recession and interest rate falls, exeptation from risk free instrument will decrease and bond will be purchased even at premium.
Let the bond’s current yield be X, so
Conditionally, 360 + 5.951 X = 1125
=> X = (1125-360)/5.951 = 128.55
As the amount of Current yeild is $ 128.55, rate of current yield = 128.55/1000 * 100 = 12.85%
Year Interest income DF @8% Present value (PV) 1 to 20 65 9.818 638.17 20 1000 0.215 215 Total 853.17