Determine the current market prices of the following $1,000 bonds if comparable

Question

Determine the current market prices of the following $1,000 bonds if comparable raste is 10% and answer the following questions.

XY 5.25% (interest paid annually) for 20 years

AB 14% (interest paid annually) for 20 years

a. which bond has a current yeild that exceeds the yeild to maturity?

b. which bond may you expect to be called?why?

c. if CD, inc., has a bond with a 5.25% coupon and a maturity of 20 years but which was lower rated, what would be its price relative to the XY, Inc., bond? Explain.

Type your question here

Explanation / Answer

At the comparable rate (10%), the present value of the $1000 maturity value of the bond is 1000*(1.10^-20) = 148.6436

Each bond makes an annual payment of the bond rate times the face value. For bond XY, that is $52.50, For bond AB, that is $140. At the comparable rate (10%), the present value of the series of payments is the payment value times
(1 - (1.10^-20))/.1 = 8.5135637

Your 5.25% bond (XY) has a value of
148.6436 + 52.50*8.5135637 = 148.6436 + 446.9621 = 595.6057
˜ $595.61

Your 14% bond (AB) has a value of
148.6436 + 140*8.5135637 = 148.6436 + 1191.8989 = 1340.5425
˜ $1340.54

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