1. For a bond selling for $696, with a par value of $1000 and a coupon rate of 5
ID: 2711621 • Letter: 1
Question
1. For a bond selling for $696, with a par value of $1000 and a coupon rate of 5.57 percent, the current yield is? Round the answer to two decimal places.
2. General Mills has a $1,000 par value, 13-year to maturity bond outstanding with an annual coupon rate of 8.40 percent per year, paid semiannually. Market interest rates on similar bonds are 12.48 percent. Calculate the bond’s price today.
Round the answer to two decimal places.
3. 7 years ago, Delicious Mills, Inc. issued 30-year to maturity bonds that had a 10.17 percent annual coupon rate, paid semiannually. The bonds had a $1,000 face value. Since then, interest rates in general have changed and the yield to maturity on the Delicious Mills bonds is now 12.60 percent. Given this information, what is the price today for a Delicious Mills bond?
Round the answer to two decimal places.
Explanation / Answer
Answer (1)
Current Yield = 8.00%
Current Price = $696
Par value = $ 1000
Coupon rate = 5.57%
Coupon amount = 1000 * 5.57% = 55.70
Current Yield =Coupon Amount / Purchase Price * 100
= ($55.70/$696) * 100 = 8.00287 or 8.00%
Answer (2)
Bond Price = $ 740.83
Parvalue = $ 1000
Annual Coupon rate = 8.40%
Semi-annual coupon payment = 1000 * 8.4% * 0.5 = $42
Market Interest rate = 12.48% or semi-annual rate = 6.24%
Time to maturity = 13 years or 13*2 = 26 semi-annual periods
Market Price = 42 * [(1-(1/1.0624)^26)/0.0624] + 1000/(1.0624)^26
= 42 * [(1-(1/4.824914)/0.0624] + 1000/4.824914
= 42 * [(1-0.2072576)/0.0624] + 1000*0.2072576
= 42 * (0.79274244/0.0624) + 207.2576
= 42 * 12.7042058 + 207.2576
= 533.5766 + 207.2576
= $ 740.83
Answer (3)
Current Price of Delicious Mills Bond = $ 818.75
Coupon rate = 10.17% semi-annually
Semi-annual Coupon amount = $1000 * 10.17% * 0.5 = $ 50.85
Time to maturity at the time of issue = 30 years
Time to maturity after 7 years = 30-7 = 23 years or 23*2 = 46 semi-annual periods
Ytm = 12.60% or semi-annual yield of 6.3%
Price of Delicious Mills Bond today = 50.85 * [(1-(1/1.063)^46)/0.063] + 1000/(1.063)^46
= 50.85 * [(1-(1/16.61614)/0.063] + 1000/16.61614
= 50.85 * [(1-0.060182445)/0.063] + 1000 * 0.060182445
= 50.85 * (0.93981755/0.063) + 1000 * 0.060182445
= 50.85 * 14.9177389 + 60.182445
= 758.567023065 + 60.182445
= 818.7494 or 818.75 (rounded off)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.