Question

outstanding. Each id for conslderation youdst 6. The Top Manufacturing p Spin Manufacturing Co. has a series of $1.000 par value bonds bond pays interest semi-annually an due in 4 10%, what is the current price of d carries an annual coupon rate of 6%. Some bonds are years, while others are due in 10 years. If the required rate of return on bonds is a) the bonds with four years to maturity? b) the bonds with 10 years to maturity? c) Explain the relationship between the number of years until a bond matures and its price.

Answer 1

	CALCULATION OF THE VALUE OF THE BOND INTEREST IS PAID SEMI ANNUALLY
	Answer =a)
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =			$1,000
	Annual Coupon %			6.00%
	Annual Coupon Amount			$60
	Semi Annual Coupon Amount			$30
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 4 years
	Interest is paid semi annyally so total period = 4 Years * 2 = 8 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 10%
	Bonds interest is paid semi annualy means so discounting factor = 10 % /2= 5 %
	PVF = 1 / Discount rate = 1/ 1.05
	Result of above will again divide by 1.05 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF @ 5%	Present Value
	1	Interest	$30	0.9524	$28.57
	2	Interest	$30	0.9070	$27.21
	3	Interest	$30	0.8638	$25.92
	4	Interest	$30	0.8227	$24.68
	5	Interest	$30	0.7835	$23.51
	6	Interest	$30	0.7462	$22.39
	7	Interest	$30	0.7107	$21.32
	8	Interest	$30	0.6768	$20.31
	8	Par Value of Bond	$1,000	0.6768	$676.84
		Total			$870.74
		Current Bonds Price =			$870.74
	Answer =B)
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =			$1,000
	Annual Coupon %			6.00%
	Annual Coupon Amount			$60
	Semi Annual Coupon Amount			$30
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 10 years
	Interest is paid semi annyally so total period = 10 Years * 2 = 20 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 10%
	Bonds interest is paid semi annualy means so discounting factor = 10 % /2= 5 %
	PVF = 1 / Discount rate = 1/ 1.05
	Result of above will again divide by 1.05 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF @ 5%	PresentValue
	1	Interest	$30	0.9524	$28.57
	2	Interest	$30	0.9070	$27.21
	3	Interest	$30	0.8638	$25.92
	4	Interest	$30	0.8227	$24.68
	5	Interest	$30	0.7835	$23.51
	6	Interest	$30	0.7462	$22.39
	7	Interest	$30	0.7107	$21.32
	8	Interest	$30	0.6768	$20.31
	9	Interest	$30	0.6446	$19.34
	10	Interest	$30	0.6139	$18.42
	11	Interest	$30	0.5847	$17.54
	12	Interest	$30	0.5568	$16.71
	13	Interest	$30	0.5303	$15.91
	14	Interest	$30	0.5051	$15.15
	15	Interest	$30	0.4810	$14.43
	16	Interest	$30	0.4581	$13.74
	17	Interest	$30	0.4363	$13.09
	18	Interest	$30	0.4155	$12.47
	19	Interest	$30	0.3957	$11.87
	20	Interest	$30	0.3769	$11.31
	20	Par Value of Bond	$1,000	0.3769	$376.89
		Total			$750.76
		Current Bonds Price =			$750.76
		Answer = Current Price of the Bonds = $ 750.76
	Answer = C)
	Market Price of the bonds is totally depend on the years of maturity of Bonds. If the
	Bonds maturity period is more than price of the bonds is less and when the bonds
	maturity period is less than market price of the bond is more.
	It means as such period will reduce market price of the bond will increases.