Question

8) Crout Company has outstanding perpetual bonds that pay annual coupon of 3% annually. Crout has assessed that the required rate of return on these bonds today is 5.6%. At what price are the bonds expected to trade in the market today? 9) Six years ago, Antitea Corp. sold a 20-year bond with a 14% annual coupon rate, and a 9% call premium over par. Today, Antitea called the bonds. The bonds originally were sold at their par value of $1000 at the time of issue. Compute the realized rate of return for investors who purchased the bonds when they were issued and who surrender the bonds today at the call price. 10) During the global financial crisis in December of 2008, the 3-month, risk-free, pure discount (zero coupon) T-Bill briefly traded in the market at a price of S1002.56 per S1000 par value bond! What is the YTM on this T-Bill, expressed in EAR?

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Answer 1

A	B	C	D	E	F	G	H	I
2		8)
3		Par value (F)	$1,000
4		Interest rate (Coupon rate)	3.00%
5		Required return	5.60%
6
7		Coupon is paid annually, therefore
8
9		Annual coupon (C)	$30.00	=D3*D4
10		Annual YTM (i)	5.60%	=D5
11
12		Price of a bond is the present value of future cash flows.
13		Perpetual bonds pay coupon forever.
14		Therefore the present value of the cash flow of a perpetual bond will be the present value of a perpetuity.
15		Thus,
16		Current Price of the perpetual bond	=Annual Coupon / Required rate of return
17			$535.71	=D9/D10
18
19		Thus the price of the perpetual bond will be	$535.71
20