Question

A $2,000,000 bond was issued on September 15 2015 with a 5 year maturity. Coupon rate is 5.5% and the present YTM is 5.75% p.a. compounded half-yearly. Interest is paid semi annually. How much is the bond worth on 15 March 2018? a. $1,994,051.41 O b. $1,988,509.75 OC. $1,911,077.19 d. $2,011,531.45 e. $1,863,887.66

Hi!

Can you please help me with these questions as my teacher did not provide the answers.

Thanks!

Answer 1

Value of Bond on March15,2018:

Number of semi annual period till maturity

10

(5*2)

Semi annual periods expired till March15,2018

5

Nper

Number of semi annual period left

5

(10-5)

Rate

Semi annual YTM =(5.75/2)%

2.88%

Pmt

Semi annual Coupon payment =(2000000*5.5%)/2

$55,000

Fv

Amount to be received on maturity

$2,000,000

PV

Value of Bond on March15,2018

$1,988,509.75

(Using PV function of excel with Rate=2.88%,Nper=5,Pmt=-55000,Fv=-2000000)

ANSWER:

b.$1,988,509.75

Highest to lowest expected return:

Return and risk are related, higher risk, higher return

Equity has highest risk,Risk of debt is lowest

ANSWER:

a.Ordinary Equity,Preference Shares,Debt

Covenants are designed :

ANSWER:

a.to protect the interest of the company

Face Value

$1,000

Yield to maturity

4.60%

Annual Coupon payment =23*2

$46

Coupon payment as percentage of face value=46/1000

4.60%

Since Rate of Coupon and Yield are same,it will sell at par

ANSWER:

a.par

D4=Dividend in year 4=$0.90

g=Dividend growth rate =4%

D5=Dividend in year 5=$0.9*(1+0.04)=

$0.936

R=Required rate of return=14%=0.14

P4=Price in year 4 =D5/(R-g)=0.936/(0.14-0.04)=

$9.36

Current Market Price =9.36/((1+0.14)^4)

$5.54

ANSWER:

c .$5.33

Note, minor difference may be due to approximation

fe =PV(D7,D6,-D8,-D9) D10 Н L. Semi annual periods expired till March15,2018 5 5 (10-5) 6 Nper Number of semi annual period left Semi annual YTM =(5.75/2)% Semi annual Coupon payment =(2000000*5.5%)/2 2.88% Rate 8 Pmt $55,000 9 Fv $2,000,000 Amount to be received on maturity 10 PV $1,988,509.75 Value of Bond on March15,2018 (Using PV function of excel with Rate=2.88%,Nper=5,Pmt=-55000,Fv=-2000000)