Par Bond.

Price and Rates

(1) What is the price of the 3year bond if investor’s required rate of return is 10%, and coupon rate is 10% with $1,000 face value?
(2) How much is the total cash proceeds when the firm issues (sells) #1,000,000 of the bond?
(3) How much is the total amount of principal the firm should pay back at maturity?

Present Value of Bond ($) 0 1 2 3

Future Cash Flows 100.00 100.00 1,000.00
=D9/(1+10%)^D8PV of Future Cash Flows 1 90.91
=E9/(1+10%)^E8PV of Future Cash Flows 2 82.64
=F9/(1+10%)^F8PV of Future Cash Flows 3 751.31
=SUM(C10:C12) Present Value of Bond (sum) 924.87
Present Value of a Bond (equation) 1,000.00 =100/(1+10%)^1+100/(1+10%)^2+1100/(1+10%)^3
=C13*1000000 Total Cash proceeds when issues 924,868,519.91
1. Yield To Maturity (Annual %)
=1000*1000000 Total Principal to pay back at maturity 1,000,000,000.00 Required rate of return until maturity
Yield To Maturity = Current Yield + Investment Yield
Bond Rates (%) 2. Current Yield (Annual %)
Coupon rate 10% #N/A Income(Coupon) Gain based on bond price purchased
Current Yield = Annual coupon payments / Purchase price x 100
Yield to Maturity 10% #N/A
3. Investment Yield (Annual %)
Current Yield 10.81% =10%*1000/C13 Capital Gain, Bond Equivalent Yield (difference btw bond price and par value)
Investment yield -0.81% =C20-C21 Investment Yield = Yield To Maturity – Current Yield
Perpetual Bond. Price and Rates

Q1. A perpetual bond offers a regular coupon of $80 per year forever (i.e. 8% of the par value of $1,000).
Suppose that the current market rate of the bond is now 10%. What is the current market value of the bond?
Bond Price ($)
Market value of the bond 800.00 #N/A
Discount or Premium Disc

Q1-1. If market rates are 6%, What is the current market value of the bond?
Bond Price ($)
Market value of the bond 133333.33% =80/6%
Discount or Premium Prem

Q2. If an irredeemable (perpetual) bond offers an annual coupon of $9.5 and is currently trading at $87.50,
with the next coupon due in one year, the rate of return is:
Bond Rates (%)
Rate of Return (YTM) 10.86% =9.5/87.5 pv = c /r r = c /pv
Current Yield 10.86% =9.5/87.5
Investment Yield 0.00% =C18-C19
Requirement 1. Your company is planning to raise cash by issuing one of the financial securities from the market. You have two options
such as Financial Instrument A or B below. Calculate the Present Value of each financial instrument and compare between them.
Which Financial Instrument is better off to raise more capital?

Financial Instrument A. Financial Instrument B.

Maturity (years) 4 Maturity (years) Infinite
Coupon rate (% annual) 7% Coupon rate (% annual) 6%
Par Value ($) 100 Par Value ($) 100
Market rate (% annual) 6% Discount rate (% annual) 7%
The number of issuance (#) 1,000,000 The number of issuance (#) 1,300,000
What is the name of this financial instrument? Regular Bond What is the name of this financial instrument? Perpetual bond
Premium, Discount, or Par? Premium Premium, Discount, or Par? Disc
Present Value per a security ($) $103.47 =103.47 Present Value per a security ($) 85.71 =6/7%
Total Cash Proceed from the issuance ($) 103,470,000 =C12*C15 Total Cash Proceed from the issuance ($) 111,428,571 =F12*F15
=103.47
Requirement 2. Calculate YTM, Current Yield, and Investment Yield of each instrument for the investor's perspective.

Financial Instrument A. Financial Instrument B.

Yield to Maturity (%) 6.00% #N/A Yield to Maturity (%) 7.00% #N/A
Current Yield (%) 6.77% =7/C15 Current Yield (%) 0.07 =6/F15
Investment Yield (%) 5.93% =C21-C22% Investment Yield (%) 0.00% =F21-F22