I. PROBLEMS. A. We buy a 20 year maturity bond, which we intend to sell in 3 yea
ID: 2779537 • Letter: I
Question
I. PROBLEMS. A. We buy a 20 year maturity bond, which we intend to sell in 3 years when required rates are 12%. The market rates now are 14%, and the interest the bond issuer pays per annum is $80. Compute the market price of the bond. B. There is a 5%, 13 year bond that has a price of $1200. If it is callable at 104 par in 3 years compute the YTM and the coupon rate. C. A preferred stock is paying S6 per annum and is callable after 7 years. The yields for similar instruments are 8%. Derive the price of the preferred stock. What is its price , if it is not callable? D. If we want to purchase a 30 year. 9% bond now, when interest rates are 10%, how much should we pay, if we know the following. We intend to sell it in 7 years at which time we estimate the required rates to be 2% annually. E. Compute the price of a 4% bond which has 11 years of life left and which has a YTM of 5%.Explanation / Answer
a. $602.65
b. Coupon rate
Bond price = C [1 - 1/(1 + r)t] / r + F / (1 + r)t
1200= C *9.3936+1000*.5303
1200-530.3 = 9.3936C
C = 669.7/9.394
C= 71.29
Coupon rate = 7.13%
Yield to call = 1.28%
c. Price of preferred stock when callable = 614.729
Price when perpetual = 75
d. 2% annually what?
e. Price = 916,96