SCHOOL OF BUSINESS

GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS
Student name: Hoàng Lâm Tâm Như Student ID number: 21000684

Student name: Nguyễn Thị Thuỷ Nhu Student ID number: 21000922

Student name: Nguyễn Trúc Ngân Student ID number: WSU21000027

Student name: Trần Thị Kim Tuyền Student ID number: 21000484

Student name: Lê Ngọc Minh Thư Student ID number: 21000727

Student name: Hà Minh Quân Student ID number: 21000664

UNIT AND TUTORIAL DETAILS

Unit name: Corporate Finance Unit number: CF-T123WSB-5

Tutorial/Lecture: 4 Class day and time: Wed 12:00 am – 15:15 pm

Lecture or Tutor name: Từ Thị Kim Thoa

ASSIGNMENT DETAILS

Title: Group 3 – Exercise 3

Length: Due date: 01/03/2023 Date submitted: 01/03/2023

Home campus (where you are enrolled): ISB-WesternSydney Vietnam Campus

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ARO 00398 09/15

1|Page
 Take-home Exercise 3
Part A
What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon if its required
return is 11.5%?
Part B
(1) What is the value of a 13% coupon bond that is otherwise identical to the bond described in
part A? Would we now have a discount or a premium bond?
(2) What is the value of a 7% coupon bond with these characteristics? Would we now have a
discount or a premium bond?
(3) What would happen to the values of the 7%, 10%, and 13% coupon bonds over time if the
required return remained at 11.5%?
Part C
(1) What is the yield to maturity on a 10-year, 10.5% annual coupon, $1,000 par value bond that
sells for $887.00 (a)? That sells for $1,134.20 (b)?
(2) What is the total return, the current yield, and the capital gains yield for the discount bond?
Assume that it is held to maturity and the company does not default on it.
Part D
How does the equation for valuing a bond change if semiannual payments are made? Find the
value of a 10-year, semiannual payment, 10% coupon bond if nominal rd = 14.5%.
Part E
Suppose for $1,000 you could buy a 11.5%, 10-year, annual payment bond or a 11.5%, 10-year,
semiannual payment bond. They are equally risky. Which would you prefer? If $1,000 is the
proper price for the semiannual bond, what is the equilibrium price for the annual payment bond?
Part A
T = 10 years
c% = 10%
Par (face) value = $1,000
R = 11.5%

Coupon payment (C) = c% x FV = 10% x 1,000 = $100

The value of the 10% coupon bond:

−𝑇
1 − (1+𝑅) ⎤ 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒
P = C x ⎡⎢ 𝑅 ⎥ + 𝑇
⎣ ⎦ (1+𝑅)
−10
1 − (1+11.5%) 1,000
= 100 x ⎡⎢ 11.5%
⎤ +
⎥ 10
⎣ ⎦ (1+11.5%)
≃ $913.48

Part B
(1) c% = 13%
T= 10 years
Face value (FV)= $1,000
R= 11.5%
→ Annual coupon payment ( C ) = c% x FV= 13% x 1,000 = $130
→ The value of a 13% coupon bond is:
−𝑇
1 − (1+𝑅) ⎤ 𝐹𝑉
P = Cx ⎡⎢ 𝑅 ⎥ + (1+𝑅)𝑇
⎣ ⎦
−10
1 − (1+11.5%) 1,000
= 130 x ⎡⎢ 11.5%
⎤ +
⎥ 10 ≃ $1,086.52
⎣ ⎦ (1+11.5%)
c% = 13% > YTM = 11.5% ⇔ P ≃ $1,086.52 > FV= $1,000
⇒ This is a premium bond.

(2) c= 7%
→ Annual coupon payment ( C ) = c% x FV= 7% x 1,000 = $70
→ The value of a 7% coupon bond is

−𝑇
1 − (1+𝑅) ⎤ 𝐹𝑉
P = C x ⎡⎢ 𝑅 ⎥ + 𝑇
⎣ ⎦ (1+𝑅)
 −10
1 − (1+11.5%) 1,000
= 70 x ⎡⎢ 11.5%
⎤ +
⎥ 10 ≃ $740.45
⎣ ⎦ (1+11.5%)
Because c% < YTM ( 7% < 11.5%) ⇒ This is a discount bond.
(3)
We have the value of 7% coupon bonds is nearly $740.45
the value of 10% coupon bonds is nearly $913.48
the value of 13% coupon bonds is nearly $1,086.52
→ The value of 7% and 10% coupon bonds (discount bond) would increase over time to face value
($1,000), while the value of coupon bonds in 13% (premium bond) would decrease over time to
face value ($1,000) at the maturity date.

Part C:
(1) Par Value= $1,000
Coupon Rate c%= 10.5%
Number of year T = 10 years
Present value a) 𝑃1= $887 b;) 𝑃2= $1,134.20

Coupon payment C= c% x FV= 10.5% x 1,000= $105

The yield to maturity (YTM) would be:

−𝑇
1 − (1+𝑅) ⎤ 𝐹𝑉
a) 𝑃1 = C x ⎡⎢ 𝑅 ⎥ + 𝑇
⎣ ⎦ (1+𝑅)
−10
(1−(1+𝑅) ) 1000
⇔ 887 = 105 x 𝑅
+ 10
(1+𝑅)
⇒ R= YTM = 0.125447 ≃ 12.545%
c%= 10.5% < YTM = 12.545% ⇒ This is a discount bond.
−𝑇
1 − (1+𝑅) ⎤ 𝐹𝑉
b) 𝑃2= C x ⎡⎢ 𝑅 ⎥ + 𝑇
⎣ ⎦ (1+𝑅)
−10
(1−(1+𝑅) ) 1000
⇔ 1,134.20 = 105 x 𝑅
+ 10
(1+𝑅)
⇒ R ≃ 0.0846 ≃ 8.46%
c%= 10.5% > YTM ≃ 8.46% ⇒ premium bond

(2)
Total return for discount bond is 12.545%
𝐴𝑛𝑛𝑢𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝐶 105
● The current yield = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑
= 𝑃
= 887
= 11.84%
We have:
Total return = YTM = Current Yield + Capital Yield
⇒ Capital Yield = YTM - Current Yield = 12.545% - 11.84% = 0.705%
Part D
The equation for valuing a bond (annual payment):
−𝑇
1 − (1+𝑅) ⎤ 𝐹𝑉
P = C ⎡⎢ 𝑅 ⎥ + 𝑇
⎣ ⎦ (1+𝑅)

→ Changes in the equation for valuing a bond (semiannual payment):

𝑅 −𝑇×2
𝐶 ⎡ 1−(1+ 2 ) ⎤ 𝐹𝑉
𝑃 = 2⎢ ⎥+
⎢ 𝑅
⎥ 𝑅 𝑇×2
(1+ 2 )
⎣ 2
⎦

Coupon payment ( C ) = 10% x 1,000 = $100

R = 14.5%
The value of a 10-year, semiannual payment, 10% coupon bond if nominal rd = 14.5% is:
14.5% −10×2
100 ⎡ 1−(1+ 2 ) ⎤ 1,000
𝑃= 2 ⎢ ⎥+ ≃ $766.2
⎢ 14.5%
⎥ (1+
14.5% 10×2
)
⎣ 2
⎦ 2

Part E
1) The semiannual payment would be better
0.115 2
Because: Effective annual rate ( EAR) = (1 + 2
) – 1= 11.83%
The EAR of 11.83% is greater than 11.5% of annual bond → buy semiannual payment bond due to
high rate of return
2) What is the equilibrium price for the annual payment bond?
T = 10
c% = 11.5% → C = c% x FV = 11.5% x 1,000 = $115
YTM = 11.83%

→ The equilibrium price for the annual payment bond:

−10
1−(1+11.83%) 1,000
𝑃 = 115 𝑥 ⎡⎢ 11.83%
⎤+
⎥ 10 ≃ $981.22
⎣ ⎦
(1+11.83%)
→ At the price of $981.22, the annual and semiannual bonds would be in equilibrium because
investors would earn 11.83% on either bond.