Question

BP has a $1,000 par value bond outstanding that pays 12 percent annual interest. The current yield to maturity on such bonds in the market is 10 percent. Compute the price of the bonds for the following maturity dates. Show all your work IN EXCEL for full credit. a. 30 years b. 10 years c. 5 years

Answer 1

Case-(a) 10% 30 Annual interest rate, RATE # of years to maturity, NPER Annual coupon payment, PMT Maturity amount at the end, FV Annual coupon type, TYPE Price of the bonds $120 $1,000 0 $1,188.54 Case-(b) 10% 10 $120 $1,000 0 $1,122.89 Case-(c) 10% 5 [Time gap in years between year-5 and 8] $120 ($1,000 x 12% --> Coupons are payable at coupon rate on face value of the bonds] $1,000 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. $1,075.82 [Ref: NOTE] NOTE: For Case-(a): Price of the bonds is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=10%; nper=30; pmt=-120; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflows; type=0 as coupons are paid at the end of each year only. For Case-(b): Price of the bonds is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=10%; nper=10; pmt=-120; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflows; type=0 as coupons are paid at the end of each year only. For Case-(c): Price of the bonds is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=10%; nper=5; pmt=-120; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflows; type=0 as coupons are paid at the end of each year only. E F G H I J L M 1 Case-(a) Case-(b) Case-(c) 2 Annual interest rate, RATE 10% 10% 10% 3 # of years to maturity, NPER 10 5 [Time gap in years between year-5 and 8] 4 Annual coupon payment, PMT =1000*12% =1000*12% =1000*12% ($1,000 x 12% --> Coupons are payable at coupon rate on face value of the bonds) 5 Maturity amount at the end, FV $1,000 $1,000 $1,000 6 Annual coupon type, TYPE 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. 7 Price of the bonds =PV(B2,B3,-B4,-B5,B6) =PV(C2,C3,-C4,-C5, C6) =PV(D2,D3,-D4,-D5, D6) [Ref: NOTE] 30