A Best Buy bond has a $1,000 par value, a 3% semiannual coupon rate, 5 full year
ID: 2739984 • Letter: A
Question
A Best Buy bond has a $1,000 par value, a 3% semiannual coupon rate, 5 full years remaining to maturity, and semiannual interest payments.
1. Currently your money is invested in a portfolio that generates return at the rate of 10% per year, compounded semiannually. What maximum current market price of the bond are you willing to pay? a. $845.57 b. $913.41 c. $1,000.00 d. $875.38
2. If you purchased the bond today for $980. What is the nominal annual Yield to Maturity? a. 4.98% b. 5.26% c. 6.00% d. 6.47%
3. If you purchased the bond today for $980, what is the NOMINAL annual current yield? a. 3.61% b. 6.12% c. 5.22% d. 6.00%
Explanation / Answer
Answer:
So, maximum value can be paid is 845.57, so answer is option a
Answer 2:
If you purchase bond at 980 at current price than implied discount rate is 6.47%, which can be confirmed with following calculations
So, answer is option D
Answer 3
current yield of bond = cupon interest /market price = 60/980 = 0.0612 = 6.12%, so answer is option B
Present value of bond semi annual period Cashflow Present value fator @ 5% Present value of cashflows 1 $ 30.00 0.952381 $ 28.57 2 $ 30.00 0.907029 $ 27.21 3 $ 30.00 0.863838 $ 25.92 4 $ 30.00 0.822702 $ 24.68 5 $ 30.00 0.783526 $ 23.51 6 $ 30.00 0.746215 $ 22.39 7 $ 30.00 0.710681 $ 21.32 8 $ 30.00 0.676839 $ 20.31 9 $ 30.00 0.644609 $ 19.34 10 $ 30.00 0.613913 $ 18.42 10 $ 1,000.00 0.613913 $ 613.91 Total present value of bond $ 845.57Related Questions
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