Question

Use the following information for problems 5-6: The Pocolo Corporation issued a new series of bonds on January 1, 1978. The bonds were sold at par ($1,000), have a 12 percent coupon, and mature in 30 years, on December 31, 2007. Coupon payments are made semiannually (on June 30 and not December 31). 5. What was the YTM of Pocolo's bonds on January 1, 1978? Prodotto a. 9% b. 10% c. 11% d. 12% e. 13% 6. What was the price of the bond on January 1, 1983, 5 years later, assuming that the level of interest rates had fallen to 10 percent? Wat o to a. $1074.82 b. $1075.82 c. $1077.22 d. $1181.54 e. $1182.56

Answer 1

5. For a coupon sold at par, YTM = coupon of the bond. Hence, correct answer is d - 12%

6. Correct answer is e - 1182.56. Detailed calculations as below:

Period (semi-annual)	Cash Flow	per period interest rate	Discount Factor	PV
1	60	5%	0.95	57.14
2	60	5%	0.91	54.42
3	60	5%	0.86	51.83
4	60	5%	0.82	49.36
5	60	5%	0.78	47.01
6	60	5%	0.75	44.77
7	60	5%	0.71	42.64
8	60	5%	0.68	40.61
9	60	5%	0.64	38.68
10	60	5%	0.61	36.83
11	60	5%	0.58	35.08
12	60	5%	0.56	33.41
13	60	5%	0.53	31.82
14	60	5%	0.51	30.30
15	60	5%	0.48	28.86
16	60	5%	0.46	27.49
17	60	5%	0.44	26.18
18	60	5%	0.42	24.93
19	60	5%	0.40	23.74
20	60	5%	0.38	22.61
21	60	5%	0.36	21.54
22	60	5%	0.34	20.51
23	60	5%	0.33	19.53
24	60	5%	0.31	18.60
25	60	5%	0.30	17.72
26	60	5%	0.28	16.87
27	60	5%	0.27	16.07
28	60	5%	0.26	15.31
29	60	5%	0.24	14.58
30	60	5%	0.23	13.88
31	60	5%	0.22	13.22
32	60	5%	0.21	12.59
33	60	5%	0.20	11.99
34	60	5%	0.19	11.42
35	60	5%	0.18	10.88
36	60	5%	0.17	10.36
37	60	5%	0.16	9.87
38	60	5%	0.16	9.40
39	60	5%	0.15	8.95
40	60	5%	0.14	8.52
41	60	5%	0.14	8.12
42	60	5%	0.13	7.73
43	60	5%	0.12	7.36
44	60	5%	0.12	7.01
45	60	5%	0.11	6.68
46	60	5%	0.11	6.36
47	60	5%	0.10	6.06
48	60	5%	0.10	5.77
49	60	5%	0.09	5.49
50	1060	5%	0.09	92.44
Total				1182.56