A bond of Telink Corporation pays $100 in annual interest with a $1000 par value

Question

A bond of Telink Corporation pays $100 in annual interest with a $1000 par value. The bonds mature in 15 years. The market's required yield to maturity on a comparable-risk bond is 9 percent.

a) Calculate the value of the bond

b) How does the value change if the market's required yield to maturity on a comparable-risk bond (i) increases to 14 percent (ii) decreases to 6 percent?

c) Interpret your findings in parts a and b

a) What is the value of the bond if the market's required yield to maturity on a comparable risk bond increases to 9 percent?

$                   Round to the nearest cent

b) What is the value of the bond if the markets required to yield to maturity on a comparable risk bond increases to 14 percent?

$                  Round to the nearest cent

c) The change in the value of a bond caused by changing interest rates is called interest-rate risk. Based on the answers of part b, a decrease in interest rates (the yield to maturity) will cause the value of the bond to (increase, be unchanged or decrease).

Also, based on the answers in part b, if the yield to maturity (current interest rate)

Equal the coupon interest rate, the bond will sell at (par, discount, or premium)

Exceeds the bond's coupon rate, the bond will sell at (par, discount, or premium)

Is less than the bond's coupon rate, the bond will sell at (par, discount, or premium)

Explanation / Answer

Bond Value = C{[1-(1+(YTM))-t/(YTM)] + [F / (1+ (YTM))t]

B0 = ?
C = $100
F = $1,000
YTM = 9%
t = 15

Bond Value = $100 {[1-(1+9%)-15/(9%)] + [$1,000 / (1+9%))15] = $1,081

With 14%:

With 6%:
$100 {[1-(1+6%)-15/(6%)] + [$1,000 / (1+6%))15] = $1,388

We can conclude from the above findings that if the YTM is higher than the coupon offered by the bond, its market price will be less than the Par Value. Which means that there is an inverse relationship between the YTM and the current market price of the bond.

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