A bond has a par value of $1,000, pays $50 semiannually and has a maturity of 10
ID: 2730065 • Letter: A
Question
A bond has a par value of $1,000, pays $50 semiannually and has a maturity of 10 years. If the bond earns 12% per year, what is the price of the bond? Rate 6% Nper 20 PMT $50.00 FV $1,000.00 Type 0 PV What is the yield to maturity for the bond? Nper 20 PMT $50.00 PV FV $1,000.00 Type 0 Rate What would be the bond's price if the rate earned declined to 8% per year? Rate 4% Nper 20 PMT $50.00 FV $1,000.00 Type 0 PV If the maturity period is reduced to 5 years and the required rate of return is 8%, what would be the price of the bond? Rate 4% Nper 10 PMT $50.00 FV $1,000.00 Type 0 PV What is the yield to maturity for the bond when the maturity is 5 years and the required rate of return is 8%? Nper (annualized PMT PV FV $1,000.00 Type 0 Rate What generalizations about bond prices, interest rates and maturity periods can be made based on the calculations made above? The following bonds have a par value of $1,000 and the required rate of return is 10%. Bond XY: 5¼ percent coupon, with interest paid annually for 20 years Bond AB: 14 percent coupon, with interest paid annually for 20 years What is each bond's current market price? Bond XY Bond AB Rate 5.25% 14% Nper 20 20 PMT $52.50 $140.00 FV Type 0 0 PV If current interest rates are 9%, which bond would you expect to be called? Explain.
Explanation / Answer
A bond has a par value of $1,000, pays $50 semiannually and has a maturity of 10 years. If the bond earns 12% per year, what is the price of the bond?
Answer:(i)
Rate 6%
Nper 20
PMT $50.00
FV $1,000.00
Type 0
Price=$50*PVIFA(6%,20)+$1000*PVIF(6%,20)
=885.3
What is the yield to maturity for the bond?
Answer:
Nper 20
PMT $50.00
PV 885.30
FV $1,000.00
Type 0
Rate 12%
What would be the bond's price if the rate earned declined to 8% per year?
Answer: Rate 4%
Nper 20
PMT $50.00
FV $1,000.00
Type 0
PV=$1135.9
If the maturity period is reduced to 5 years and the required rate of return is 8%, what would be the price of the bond?
Answer: Rate 4%
Nper 10
PMT $50.00
FV $1,000.00
Type 0
PV=$1081.11
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