Problem 6 Intro One of General Electric's bond issues has an annual coupon rate of 3.7%,...

Question

Question

Answer 1

Answer #1

Part 1

Number of years = n = 5 years

Yield I/Y= 6%

Face Value FV = $1000

Annual Coupon Payments P = 3.7% of 1000 = 37

Hence, PV = P/(1+r) + P/(1+r)² + .... + P/(1+r)ⁿ + FV/(1+r)ⁿ

= P[1 - (1+r)^-n]/r + FV/(1+r)ⁿ = 37(1 - 1.06^-5)/0.06 + 1000/1.06⁵ = $903.12

Part 2

Number of years = n = 10 years

Yield I/Y= 6%

Face Value FV = $1000

Annual Coupon Payments P = 3.7% of 1000 = 37

Hence, PV = P/(1+r) + P/(1+r)² + .... + P/(1+r)ⁿ + FV/(1+r)ⁿ

= P[1 - (1+r)^-n]/r + FV/(1+r)ⁿ = 37(1 - 1.06^-10)/0.06 + 1000/1.06¹⁰ = $830.72

Answer 2

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