FDX has a bond outstanding that matures on Nov. 15,2045 with an annual coupon ra

Question

FDX has a bond outstanding that matures on Nov. 15,2045 with an annual coupon rate of 4.75% and is priced at 98.5. Yield to maturity= 4.85%. Interest is paid semianually and the par value of each bond is $1,000. Use this bond to estimate FDX's cost of new debt, if it were to issue new debt. Assume bod has 30 years remaining to maturity. Current price of FDX is $984.29 and assume you hold the bond for one year. Calculate the price of the bond in one year if the interest rates remain at 4.85% the entire year. WHat is your anticipate annual capital gain/loss yield and current yield?

Explanation / Answer

Calculate the price of the bond after 1 year as follows in an excel

=PRICE(A1,A2,4.75%,4.85%,100,2) = 98.451

Here A1 contains today's date, A2 contains maturity date which is 29 years from today, 4.75% is the coupon rate, 4.85% is the yield, 100 is the redemption value, and 2 is to say coupons are paid semi anually.

So price of a $1,000 FV = 98.451 * 1000 /100 = 984.51

Capital gain = (984.51 - 984.29) / 984.29 = 0.02%

Since the interest rates are same, there has to be no capital gains.

Current Yield = Coupons payment / Current price

Coupon payment = 4.75% * 1000 = 47.5

Price = 984.51

So Current Yield = 47.5 / 984.51 = 4.82%

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.