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QUESTION 51 The following information applies to the next 4 questions. A major chemical manufacturer has experienced a market reevaluation lately due to a number of lawsuits. The firm has a bond issue outstanding with 20 years to maturity and a coupon rate of 7% (paid annually). The required rate has now risen to 10%. The par value of the bond is $1,000. What is the current value of these securities? O 727.88 O 744.59 O 794.28 818.10 881.68
What is the current yield of this bond? 8.12% 8.22% , o 8.35% o 8.55% o 9.40%
what would be the selling price of the same 7% coupon bond one year later, if the market interest rate remains at 10%? 735.23 749.05 805.67 O823.56 898.42
If the 7% coupon bond with time to maturity of 20 years is selling for $901.82, what is the yield to maturity of the bond? 6.5% 8.0% 9.0% 9.5% 10.0%
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Answer #1

Bond price is the present value of future cash flows of the bond. Current yield is annual coupon dividend by current price of bond. A1 Par value (F) Interest rate (Coupon rate) Market demanded return (Yield to maturity) Time to maturi $1,000 7.00% 10.00% 20 Years Interest is paid once a year i.e. annual Annual coupon (C) Annual Period (n YTM (i) Current Value of the bond can be calculated by finding the present value of cash flows of bonds. Cash Flow of Bonds can be written as follows: Period Cash Flow of Bonds 10 $70.00 12 10.00% 14 15 16 17 18 19 4 $70.00 $70.00 $70.00 $70.00 $70.00 $1,070.00 Current Value of Bond Where, C is coupon, F is par value of bond, i is market rate and n is total number of periods 21 Current Value of Bond =C*( P/A, i, n)+FYP/F,i,n) 744.59 D10 PV(D12,D11,-1,0)+D4 (1/((1+D12)AD11)) Hence current market value of bond is $744.59 24 25 26 27 Thus the second option is correct Annual coupon/Current Value of bond $70/744.59 Current Yield 29 9.40% -D10/D24 31 Hence the current Yield is 9.40% 32 Thus the fifth option is correct. 35 36 37 B Par value (F) Interest rate (Coupon rate) Market demanded return (Yield to maturity) Time to maturity $1,000 7.00% 10.00% 19 Year Interest is paid once a year i.e. annual Annual coupon (C) Annual Period (n YTM (i Current Value of the bond can be calculated by finding the present value of cash flows of bonds. Cash Flow of Bonds can be written as follows: Period Cash Flow of Bonds 39 $70.00 19 10.00% 41 19 $70.00 $70.00 $70.00 $70.00 $70.00 $1,070.00 47 Current Value of Bond Where, C is coupon, F is par value of bond, i is market rate and n is total number of periods. 49 Current Value of Bond 51 52 53 749.05 -D10 PV(D12,D11,-1,0)+D4 (1/((1+D12)D11)) Hence current market value of bond is 749.05 Thus the second option is correct

Yield to maturity is the discount rate at which NPV of cash flows of investor is zero. calculation of yield to maturity of the bond:A1 57 $1,000 7.00% $902 Face value Coupon rate Current Price Years to Maturi Annual Coupon Cash flow to investor will be as follows: Year Cash flow 59 61 20 years $70.00D58*D59 63 2 4 ($902)$70$70 $70 $70 S $70$1,070 Yield to maturity is the rate at which if future NPV to Investor will be zero Rate(nper,pmt,PV, [fvl,type) function of excel can be used to find the yield to maturity as follows: NPER PMT PV 71 72 73 74. 75 76 ($901.82 $1,000 Yield to maturity 8.00%-RATE(D70,D71,D72,D73) Thus yield to maturity is Hence the second option is correct 8.00%

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