660 Words3 Pages

A company issued a 30-year, $1,000 par value bond that has 10.85% coupon rate.
Coupons are paid out semi-annually and the relevant interest rate is 9% compounded semiannually.
a. (3 points) What was the value of this bond when it was issued?
PMT = (.1085/2)*1000=54.25
N = 60 R = 0.09/2=0.045 (or 4.5 for calculator purposes) FV = 1000 PV =?
Answer: 1,190.90
b.What is the value of this bond 10 years after it was issued?
PMT = (.1085/2)*1000=54.25
N = 40 R = 0.09/2=0.045 (or 4.5 for calculator purposes) FV = 1000 PV =?
Answer: 1170.20 The price will decrease as approaching maturity since at maturity (just before expiration) it will be worth the par ($1,000) since this is a premium bond.
2.Suppose your company needs to raise $30 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you’re evaluating two issue alternatives: an 8 percent semiannual coupon bond and a zero coupon bond. When find PV do 30m/PV to get the amount of coupon bonds.Part B: In 30 years, what will your company’s repayment be if you issue the coupon bonds? What if you issue the zeros? The repayment of the coupon bond will be the par value plus the last coupon payment times the number of bonds issued. So: Coupon bonds repayment = 30,000($1,000+40)) = $31,200,000
The repayment of the zero coupon bond will be the par value times the number of bonds issued, so:Zeroes: repayment = 315,589($1,000+0) = $315,588,822
3. Bond P is a premium bond with a 12 percent coupon. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 9 percent, and have five years to maturity. What is the current yield for bond P? For bond D?
Explain your answers and the interrelationships among the various types of yields.
Bond P: PMT=120 I=9 FV=1000 N=5 PV=1116.69

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