a. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000...

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a. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 7.8%. Now, with

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Answer 1

Answer #1

a. To find the bond price, we have to use PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

rate=yield to maturity=15%

nper=maturity period=8

pmt=coupon rate*face value=7.8%*1000=78 (bond is issued at face value, hence yield to maturity=coupon rate=7.8%)

fv=1000

=PV(15%,8,78,1000,0)

PV=$676.91

The bond price=$676.91

b. If they buy the bond today, price of the bond=$676.91.

Face value becomes 90%*face value=90%*1000=900

Yield to maturity needs to be found using RATE function in EXCEL

=RATE(nper,pmt,pv,fv,type)

nper=maturity period=8

pmt=78

pv=$676.91

fv=900

=RATE(8,78,-676.91,900,0)

RATE=14.01%

Yield to maturity=14.01%

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Answer 2

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a. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000...

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