Question

Problem 1: Consider a $1000 bond with a coupon rate of 10% and annual coupons. The par value is $1,000, and the bond has 5 years to maturity. The yield to maturity is 9%. For each question, show your work/calculations. A. What is the present value of coupons? B. What is the present value of face value (i.e. par value)? C. What is the value of the bond? D. Is it a premium or discount bond? Problem 2: Consider a $1000 bond with a coupon rate of 7.5% and annual coupons. The par value is $1,000, and the bond has 10 years to maturity. The yield to maturity is 10%. For each question, show your work/calculations. A. What is the present value of coupons? B. What is the present value of face value (i.e. par value)? C. What is the value of the bond? D. Is it a premium or discount bond? Grading Criteria: Your submission will be evaluated based on the following criteria (1%): • Content: adequate coverage of topic, logic of arguments, relevance and indication of all used resources. Presentation Clarity: use of appropriate headings, appropriate organization, and ease of understanding • Accuracy: free of spelling, grammar, and content errors.

Answer 1

Problem 1:

A B un UwN Coupons 100.00 100.00 100.00 100.00 100.00 1,000.00 PV @ 9% PV of Cash Flows 0.917431 91.74 0.84168 84.17 0.772183 77.22 0.708425 70.84 0.649931 64.99 0.649931 649.93 PV of Coupons PV of Face Value Value of Bond 388.97 649.93 1,038.90

ABC Year Coupons =1000*10% =1000*10% 3 =1000*10% 4 =1000*10% 5 =(1000*10%) 5 1000 PV @ 9% PV of Cash Flows =1/(1+0.09) B4 =C4*D4 =1/(1+0.09)^B5 =C5*D5 =1/(1+0.09) “B6 =C6*D6 =1/(1+0.09)^B7 =C7*D7 =1/(1+0.09) “B8 =C8*D8 =1/(1+0.09)^B9 =C9*D9 PV of Coupons =SUM(E4:E8) PV of Face Value =E9 Value of Bond =SUM(E4:E9) 1

Since, value of bond > Par Value, it is a Premium bond