Question

Question 2

Two years ago, MTR issued $1,000 ten-year bonds that carry a coupon rate of 8% payable semi-annually.

Required:

a. If you require an effective annual rate of return of 12%, how much are you willing to pay for the bond today?

b. What will be the bond price if the yield to maturity falls to 6% in one year?.

c. From the answer computed in above part (b), identify, with brief explanation (within 30 words), whether the bond is issued at par, premium or discount without involving any calculation.

Answer 1

a)

Face Value	$                1,000
Coupon Rate	8.00%
Discounting Rate	12.00%
Redemption Value	$                1,000
Years To Maturity	10
Coupon Payment Duration	Semi-Annually

Computation Of Bond Price
a	Semi-annual Interest Amount	$             40.00
	($1000*8%/2)
b	PV Annuity Factor for (20 Years,6%)	11.469921
c	Present Value Of Annual Interest (a*b)	$           458.80
d	Redemption Value	$       1,000.00
e	PV Factor Of (20 Years,6%)	0.31180
g	Present Value Of Redemption Amount (d*e)	$           311.80
f	Intrinsic Value ( Price ) Of The Bond (c+g)	$           770.60

b)

Face Value	$                1,000
Coupon Rate	8.00%
Discounting Rate	6.00%
Redemption Value	$                1,000
Years To Maturity	9
Coupon Payment Duration	Semi-Annually

Computation Of Bond Price
a	Semi-annual Interest Amount	$             40.00
	($1000*8%/2)
b	PV Annuity Factor for (18 Years,3%)	13.753513
c	Present Value Of Annual Interest (a*b)	$           550.14
d	Redemption Value	$       1,000.00
e	PV Factor Of (18 Years,3%)	0.58739
g	Present Value Of Redemption Amount (d*e)	$           587.39
f	Intrinsic Value ( Price ) Of The Bond (c+g)	$       1,137.54

c) Issue price of the bond is more than par hence bond issued at premium.