Question

1. The $1,000 face value ABC bond has a coupon rate of 6%, with interest paid semi-annually, and matures in 5 years. If the bond is priced to yield 8%, what is the bond's value today? (5 PTS) 2. The KLM bond has $80 yearly coupon (with interest paid quarterly), a maturity value of $1,000, and matures in 20 years. If the bond is priced to yield 6%, what is the maximum price a which you would be willing to buy the bond today? (8 PTS)

formula + answer please

Answer 1

1.

Face value (F) = $1000

Coupon rate = 6%

Coupon frequency = semi-annual

Semi-annual coupon amount (C) = 1000*6%/2 = 60/2 = $30

Maturity in years = 5

Maturity in semi-annual period (n) = 5*2 = 10

Yield to maturity = 8%

Semi-annual yield to maturity (i) = 8%/2 = 4%

Current Bond value (BV) can be calculated with following equation:

BV = C* P/A, 1, n) + F* (P/F,,n)

|(1 + i)" - 1 BV = C * i*(1+i)n + F (1 + i)"

putting the values

BV = 30 * (1 +0.04)10 – 1 0.04 * (1 +0.04)10 + 1000 * (1 + 0.04) 10

by solving:

BV = 918.89104220645

BV = $918.89

2.

Face value (F) = $1000

Annual Coupon amount = $80

Coupon frequency = quarterly

quarterly coupon amount (C) = 80/4 = $20

Maturity in years = 20

Maturity in quarter period (n) = 20*4 = 80

Yield to maturity = 6%

quarterly yield to maturity (i) = 6%/4 = 1.5%

Current Bond value (BV) can be calculated with following equation:

BV = C* P/A, 1, n) + F* (P/F,,n)

|(1 + i)" - 1 BV = C * i*(1+i)n + F (1 + i)"

putting the values

BV = 20 * (1 +0.015) 80 - 1 0.015*(1 + 0.015) 10 + 1000* |(1 +0.015)10

by solving,

BV = 1232.03661747073

BV = $1,232.04

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.