Question

You just started work at a wealth management firm and your boss asks you to evaluate a 7-year bond with a face value of $1,000 that, according to the prospectus, you can purchase next month (01-February-2019) when it is initially issued. The bond is designed to provide a 5.9% yield-to- market (YTM) and makes annual 01 February coupon payments, with both the last coupon payment and the redemption scheduled for 01 February 2026. The underwriter has stated the issuer's intention to sell the bonds at face value (par) and your plan is purchase the bonds accordingly for $1,000 apiece, meaning the coupon and the YTM will be the same on the date of the February 1sale. A. If the YTM is expected to remain constant, what is the minimum price you would accept to sell the bond on January 31, 2021, the day before you receive the 2nd coupon payment? O A O C O D O E 942.51 1,000.00 1,014.75 1,029.50 1,059.00

Answer 1

Year	cash flow	present value of cash flow = cash flow/(1+r)^n r = 5.9%
1	59	55.71293673
2	59	52.60900541
3	59	49.67800322
4	59	46.91029577
5	59	44.29678543
6	1059	750.7929734
value of bond	sum of present value of cash flow	1000
Year	cash flow	present value of cash flow = cash flow/(1+r)^n r = 5.9%	year*present value
1	59	55.71293673	55.71293673
2	59	52.60900541	105.2180108
3	59	49.67800322	149.0340097
4	59	46.91029577	187.6411831
5	1059	795.0897589	3975.448794
value of bond	sum of present value of cash flow	1000
sum of year*present value			4473.054935
duration of bond = sum of present value*year/price of bond		4473.054/1000	4.47
Modified duration of bond	macculay duration/(1+r)	4.47/(1.059)	4.22