FIN-320-T1291 Principles of Finance 20EW1 Homework:7-1

Question 3

(Bond valuation) A bond that matures in 15 years has a $1,000 par value. The annual coupon interest
rate is 11 percent and the market's required yield to maturity on a comparable-risk bond is 13
percent. What would be the value of this bond if it paid interest annually? What would be the value of this
bond if it paid interest semiannually?

a.  The value of this bond if it paid interest annually would be

870.75
$ . (Round to the nearest cent.)

b.  The value of this bond if it paid interest semiannually would be

869.41
$ (Round to the nearest cent ).

Fx = - PV (B3/ 2 , B1*2 ,55,B4,0)

Question 4

 (Bond valuation)  Pybus, Inc. is considering issuing bonds that will mature in 20 years with an
annual coupon rate of 7 percent. Their par value will be $1,000, and the interest will be paid semiannually.
Pybus is hoping to get a AA rating on its bonds and, if it does, the yield to maturity on similar AA bonds is
8 percent.  However, Pybus is not sure whether the new bonds will receive a AA rating. If they receive an
A rating, the yield to maturity on similar A bonds is
9 percent. What will be the price of these bonds if they receive either an A or a AA rating?

a. The price of the Pybus bonds if they receive an AA rating will be

650.50
$ . (Round to the nearest cent.)

b. The price of the Pybus bonds if they receive an A rating will be

598.93
$ . (Round to the nearest cent.)

ANSWER:
We know that price of the bond formula
1

Where
[ ( )]
BO=C 1− (1+r )t +
¿¿
r
BO=Bond price
f
(1+r ) t

σ =Interest route
f =face value
c=coupon payment
years
t=
periods
The problemis that they are n' tsure what rating these bonds will be given . If they are rated AA ,
the YtM will be 11.15 % . However if they receive a lower rating of A , theYtm will rise ¿12.5 % .
¿ the loder case the price for the bonds will be lower . A lower rating implies a higher requiered
return ( ytm ) , which∈turn implies a lower price .
Let us first consider the case ∈which the bonds receive the A rating .

[ ]
1− 20 x2
0.125
1000 x 7 % ( 1+
2 ) 1
Bond price=
2 ¿¿
0.125
2
+ $ 1000
[( 1+
0.125
2
20 x 2

) ]
1 1
¿ 35 1−
[ (1.0625 ) 40

]
+1000
[
(1.0625 )40 ]
0.0625

1 1
¿ 35 1−
[ 11.3020
]
+1000
[
11.3020 ]
0.0625

0.91152
¿ 35 [ 0.0625 ]
+1000 [ 0.08848 ]

¿ 510.4512+88.48=$ 598.93
AA−Rating bonds :

[ ]
1− 20 x 2
0.115
1000 x 7 % ( 1+
2 ) 1
Bond Price=
2 ¿¿
0.115
2
+1000
[( 1+
0.115
2
20 x 2

) ]
1
¿ 35
[ 1−
]
( 1.0575 )40 + 1000
¿¿ 0.0575
1
[
( 1.0575 )40 ]
1

[ ]
¿ 35 1− 9.35868 +1000 [ 0.10685 ]
¿¿ 0.0575

0.89314
¿ 35 [ 0.0575 ]
+1000 [ 0.10685 ]
¿ 543.6506+106.85
= $650.50

Question 5

(Yield to maturity) The market price is $725 for a 16-year bond ($1,000 par value) that pays
8 percent annual interest but makes interest payments on a semiannual basis (4 percent semiannually).
What is the bond's yield to maturity?

Answer:

The bond's yield to maturity is

11.88% (Round to two decimal places.)

COUPON RATE 8.00%

YEARS TO MATURITY 16
NPER 32 (years to maturity x 2)
PMT 40 (face value x coupon rate)/2
FACE VALUE $1000
PRICE = PV = $725
RATE = 5.94%
Rate(nper,pmt,-pv,fv)
Rate(32,40,-725,1000)
YIELD TO MATURNITY = RATE x 2 = 11.88%

Question 6

 (Bond valuation) Doisneau 25-year bonds have an annual coupon interest of 8 percent, make interest
payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a market's
required yield to maturity of 18 percent, are these premium or discount bonds? Explain your answer.
What is the price of the bonds?

a. If the bonds are trading with a yield to maturity of 18%, then  (Select the best choice below.)

A. there is not enough information to judge the value of the bonds.

B. the bonds should be selling at par because the bond's coupon rate is equal to the yield to maturity of
similar bonds.

C. the bonds should be selling at a premium because the bond's coupon rate is greater than the yield to
maturity of similar bonds.

D. the bonds should be selling at a discount because the bond's coupon rate is less than the yield to
maturity of similar bonds.
Your answer is correct.
b. The price of the bonds is
765.10
$ .  (Round to the nearest cent.)
ANSWER:

face value=1000
8%
coupon= x 1000=40
2
time=25 x 2=50
18 %
ytm= =0.09 %
2

fv=1000
pmt=40
N=50
I /Y =0.09
CPT PV →−765.10
Price=$ 765.10

Question 8

(Yield to maturity) Abner Corporation's bonds mature in 25 years and pay 9 percent interest annually. If
you purchase the bonds for $925, what is your yield to maturity?

Answer:

Your yield to maturity on the Abner bonds is

__9.66 %   (Round to two decimal places.)

face value=100 0
present value=$ 925
time ¿ maturity=2 5
Annual Interest=face value∗coupon rate=1000∗9 %=$ 90
Using equation with≈method :

face value− present value

¿ yield ¿ maturity=
[ Annual Coupon+
time¿
maturity ¿ ]
face value+ present value
2
 1000−925
¿ yield ¿ maturity=
[ 90+
25 ]
1000+ 925
2
93
¿ =9.66 %
962.50