Valuing Bonds Microhard has issued a bond with the following characteristics:
Par: $1,000
Time to maturity: 20 years
Coupon rate: 7 percent
Semiannual payments
Calculate the price of this bond if the YTM is:
- a. 7 percent
- b. 9 percent
- c. 5 percent
a.
To determine: The price of the bond.
Yield to Maturity:
The yield to maturity is the total yield or return which is derived from a bond until the time of the maturity. For this, it is assumed that the bond will be held until the maturity and would not be called.
Explanation of Solution
Given,
The maturity period is 20 years.
The bond is a 7% coupon bond.
The par value of the bond is $1,000.
The bond is making semi-annual payments.
The yield to maturity is 7%.
The yield to maturity for semiannual payments will be 3.5%
Calculation of the price of the bond:
The formula to calculate the price of the bond is,
Substitute $1,000 for the par value of the bond, 40
The price of the bond is $1,000.
Working note:
Calculation of the
Calculation of the
Thus, the price of the bond is $1,000.
b.
To determine: The price of the bond.
Explanation of Solution
Given,
The maturity period is 20 years.
The bond is a 7% coupon bond.
The par value of the bond is $1,000.
The bond is making semi-annual payments.
The yield to maturity is 9%.
The yield to maturity will be 4.5%
Calculation of the price of the bond:
The formula to calculate the price of the bond is,
Substitute $1,000 for the par value of the bond, 40
Thus, the price of the bond is $815.97.
Working note:
Calculation of the
Calculation of the
Conclusion:
Thus, the price of the bond is $815.97.
c.
To determine: The price of the bond.
Explanation of Solution
Given,
The maturity period is 20 years.
The bond is a 7% coupon bond.
The par value of the bond is $1,000.
The bond is making semi-annual payments.
The yield to maturity is 5%.
The yield to maturity will be 2.5%
Calculation of the price of the bond:
The formula to calculate the price of the bond is,
Substitute $1,000 for the par value of the bond, 40
Thus, the price of the bond is $1,251.04.
Working note:
Calculation of the
Calculation of the
Thus, the price of the bond is $1,251.04.
Want to see more full solutions like this?
Chapter 8 Solutions
CORPORATE FINANCE >C<
- Current Yield with Semiannual Payments A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond’s current yield?arrow_forwardBond Yields and Rates of Return A 10-year, 12% semiannual coupon bond with a par value of 1,000 may be called in 4 years at a call price of 1,060. The bond sells for 1,100. (Assume that the bond has just been issued.) a. What is the bonds yield to maturity? b. What is the bonds current yield? c. What is the bonds capital gain or loss yield? d. What is the bonds yield to call?arrow_forwardBond Value as Maturity Approaches An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of 1,000, and has a yield to maturity equal to 9.6%. One bond, Bond C, pays an annual coupon of 10%; the other bond, Bond Z, is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 9.6% over the next 4 years, what will be the price of each of the bonds at the following time periods? Fill in the following table:arrow_forward
- Default Risk Premium A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond?arrow_forwardYield to Maturity and Yield to Call Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090). What is the yield to maturity? What is the yield to call if they are called in 5 years? Which yield might investors expect to earn on these bonds, and why? The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?arrow_forwardBond Valuation and Interest Rate Risk The Garraty Company has two bond issues outstanding. Both bonds pay 100 annual interest plus 1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year. a. What will be the value of each of these bonds when the going rate of interest is (1) 5%, (2) 8%, and (3) 12%? Assume that there is only one more interest payment to be made on Bond S. b. Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningFundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
- Fundamentals of Financial Management, Concise Edi...FinanceISBN:9781305635937Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningFundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning