Here are data on $1,000 par value bonds issued by Microsoft, Ford, and Xerox at

Question

Here are data on $1,000 par value bonds issued by Microsoft, Ford, and Xerox at the end of 2008. Assume you are thinking of buying these bonds as of January 2009. Abswer the following questions:

a) Calculate the values of the bonds if your required rates of return are as follows: Microsoft 6%, Ford 15%, Xerox 10%, where:

Microsoft Ford Xerox
Coupon Interes Rate 5.25% 7.125% 8.0%
Years to Maturity   30 25 16

b) At the end of 2008, the bonds were selling for the following amounts:

Microsoft: $1,009.00
Ford: $610.00
Xerox:$805.00

What were the expected rates of return (YTM) for each bond?

c) Should you buy the bonds? Explain.

Explanation / Answer

a) Price of xerox = 80/1.1 +80/1.1^2 +80/1.1^3 ..........1080/1.1^16 =$843.53

Price of Microsoft = 52.5/1.06 +52.5/1.06^2 +52.5/1.06^3 ..........1052.5/1.06^30 =$896.76

805.00 =80/(1+r) +80/(1+r)^2 +80/(1+r)^3 ..........1080/(1+r)^16

expected rates of return (YTM)= 10.58%

For Microsoft

1,009.00 =52.5/(1+r)+52.5/(1+r)^2 +52.5/(1+r)^3 ..........1052.5/(1+r)^30

expected rates of return (YTM)=5.19%

for Ford

expected rates of return (YTM)12.15%

c) Microsoft - Should not buy as the the bond is seliing at higher price than its value

Ford -Should not buy as the the bond is seliing at higher price than its value

Xerox -Should buy as the the bond is seliing at lower price than its value

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