Question

Question #5: Bond Pricing [16 Points Calculate the prices of the following bonds (16 Points; 8 Points each] (a) A 14 year $1000 face value coupon bond that pays an coupon rate of 4.6%. The YTM = 3.2%. Assume that the coupon payments are paid semi-annually, (b) A 14 year $1000 face value coupon bond that pays an coupon rate of 4.6%. The YTM = 3.2% Assume that the coupon payments are paid annually. Question #6: Bond Pricing and Accrued Interest [10 Points) A 12 year $1000 face value coupon bond pays a coupon rate of 4.8% and has a YTM of 4.6%. Coupon payments made by the bond are paid semi-annually. (a) What is the current price of the bond? Round your final answer to two decimal places. (8 Points] (b) Suppose that it has been 90 days since the last coupon payment. How much accrued interest must the buyer of the bond pay to the seller? Round your final answer to two decimal places. [4 Points] Question #7: Holding Period Return (20 Points Assume that you have a one-year investment horizon and are trying to choose among two bonds. Both have the same default risk and mature in 6 years. The first is a zero-coupon bond that pays $1000 at maturity. The second is a $1000 par value coupon bond that has a coupon rate of 6% and makes an annual coupon payment. (a) If the YTM is equal to 3.6% what is the current prices for each of the bonds? [3 Points each; 6 Points Total] (b) Suppose that the YTM next year falls to 3.2%. Calculate the one year holding period return for each of the bonds. [Hint: One year has passed since you initially purchased the bond] [7 Points each; 14 Points Total] Question #8: Current Yield 19 Points A $1000 face-value coupon bond has a current yield of 4.70% and a market price of $970. What is the bond's coupon rate?

Answer 1

Solution to QUESTION#5

(a)-The Price of the Bond if the coupon payments are made semi-annually

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 4.60% x ½]	PMT	23
Market Interest Rate or Yield to maturity on the Bond [3.20% x ½]	1/Y	1.60
Maturity Period/Time to Maturity [14 Years x ½]	N	28
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,156.99.

“The Price of the Bond will be $1,156.99”

(b)-The Price of the Bond if the coupon payments are made annually

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 4.60%]	PMT	46
Market Interest Rate or Yield to maturity on the Bond [3.20%]	1/Y	3.20
Maturity Period/Time to Maturity [14 Years]	N	14
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,156.01.

“The Price of the Bond will be $1,156.01”

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