3. A $10,000 - 5 year bond has a coupon rate of 6.5% semi – annually. Yesterday it was rated triple B with a market rate...
3. A $10,000 - 5 year bond has a coupon rate of 6.5% semi – annually. Yesterday it was rated triple B with a market rate of 7.15%. Today it was upgraded to single A with a market rate of 6.4%. A. What was yesterday’s bond price? B. What is today’s bond price?
Homework Answers
| Par/Face value | 10000 | |||||||||
| Annual Coupon rate | 0.065 | |||||||||
| Annual coupon | 650 | |||||||||
| semi-annual coupon | 325 | |||||||||
| YESTERDAY's PRICE | ||||||||||
| Present Value = Future value/[(1+(r/m))^mt] | ||||||||||
| r is the interest rate that is 7.15%. | ||||||||||
| m is the compounding period that is 2 | ||||||||||
| mt is the time period. | ||||||||||
| price of the bond = sum of present values of future cash flows | ||||||||||
| r/2 | 0.03575 | |||||||||
| mt | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| future cash flow | 325 | 325 | 325 | 325 | 325 | 325 | 325 | 325 | 325 | 10325 |
| present value | 313.7823 | 302.9518 | 292.4951 | 282.3993 | 272.652 | 263.2411 | 254.1551 | 245.3826 | 236.913 | 7266.757 |
| sum of present values | 9730.73 | |||||||||
| Yesterday's bond price was $9730.73. | ||||||||||
| TODAY's PRICE | ||||||||||
| Present Value = Future value/[(1+(r/m))^mt] | ||||||||||
| r is the interest rate that is .064. | ||||||||||
| m is the compounding period that is 2 | ||||||||||
| mt is the time period. | ||||||||||
| price of the bond = sum of present values of future cash flows | ||||||||||
| r/2 | 0.032 | |||||||||
| mt | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| future cash flow | 325 | 325 | 325 | 325 | 325 | 325 | 325 | 325 | 325 | 10325 |
| present value | 314.9225 | 305.1574 | 295.6952 | 286.5264 | 277.6418 | 269.0328 | 260.6907 | 252.6072 | 244.7745 | 7535.171 |
| sum of present values | 10042.22 | |||||||||
| Today the interest rate decreased from 7.15% to 6.4%, the price increased to $10042.22. | ||||||||||
| Yesterday's bond price was $9730.73. | ||||||||||
| Today's bond price is $10042.22. | ||||||||||
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3. A $10,000 - 5 year bond has a coupon rate of 6.5% semi – annually. Yesterday it was rated triple B with a market rate...
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