Question

3. The valuation of bonds Seattle Seafood Company (SSC) has an issue of 7-year, 8% annual coupon bonds outstanding. The bonds, which were originally issued 15 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 10%, and are noncallable. What is the current market price of SSC's bonds? $902.63 $992.89 $767.24 $1,128.29 Are the bonds of Seattle Seafood Company selling at a discount, at par, or at a premium? Discount Premium Par What is the current yield on Seattle Seafood Company's outstanding bonds? 10.43% 8.06% 7.09% What is the expected one-year capital gain yield on the bonds of Seattle Seafood Company? 1.03% 0.915

Answer 1

Q1) We are given the below information:

Maturity	7
Coupon rate	8%
Coupon frequency	1
par value	1000
Discount rate	10.00%

Price of the bond can be calculated as follows:

Year	CF	Discount Factor		Discounted CF
1	$             80.00	1/(1+0.1)^1=	0.909090909	0.909090909090909*80=	$             72.73
2	$             80.00	1/(1+0.1)^2=	0.826446281	0.826446280991735*80=	$             66.12
3	$             80.00	1/(1+0.1)^3=	0.751314801	0.751314800901578*80=	$             60.11
4	$             80.00	1/(1+0.1)^4=	0.683013455	0.683013455365071*80=	$             54.64
5	$             80.00	1/(1+0.1)^5=	0.620921323	0.620921323059155*80=	$             49.67
6	$             80.00	1/(1+0.1)^6=	0.56447393	0.564473930053777*80=	$             45.16
7	$       1,080.00	1/(1+0.1)^7=	0.513158118	0.513158118230706*1080=	$           554.21
				Price= Sum of all Discounted CF	$           902.63

So the correct option is the 1st option.

Q2) As the par value is 1000 and the price is 902.63 so the bond is selling at a discount. Whenever the YTM>coupon rate then the bond sells at a discount, when the YTM = Coupon rate then the bond sells at par, when YTM<coupon rate, the bond sells at a premium. This is known as the inverse relation between the price and yield

So the correct option is the first 1

Q3) Current yield is calculated below:

$\\Current \ yield = \frac{coupon \ payment}{price} \times 100 \\\\Current \ yield = \frac{80}{902.63} \times 100 \\\\Current \ yield = 8.86 \%$

So the correct option is the 4rth option

Q4) Capital gain yield is calculated by solving the below equation:

PA - PO Capital Gain yield = -1 Po X 100

We need to find out the price after 1 year when only 6 year to maturity remain. It is calculated as follows:

Year	CF	Discount Factor		Discounted CF
1	$             80.00	1/(1+0.1)^1=	0.909090909	0.909090909090909*80=	$             72.73
2	$             80.00	1/(1+0.1)^2=	0.826446281	0.826446280991735*80=	$             66.12
3	$             80.00	1/(1+0.1)^3=	0.751314801	0.751314800901578*80=	$             60.11
4	$             80.00	1/(1+0.1)^4=	0.683013455	0.683013455365071*80=	$             54.64
5	$             80.00	1/(1+0.1)^5=	0.620921323	0.620921323059155*80=	$             49.67
6	$       1,080.00	1/(1+0.1)^6=	0.56447393	0.564473930053777*1080=	$           609.63
				Price= Sum of all Discounted CF	$           912.89

PA - PO Capital Gain yield = -1 Po X 100

- X 100 912.86 - 902.63 Capital Gain yield = 902.63 Capital Gain yield = 1.14%

So the correct option is the 1st one