Dominique LeBlanc is the owner of a new ten-year $50,000 8% par-value bond with

Question

Dominique LeBlanc is the owner of a new ten-year $50,000 8% par-value bond with Bermuda options and annual coupons. Allowable call dates are at the end of 6 through 10, and the call premium at the end of year n is $300(10-n). Dominique purchased the bond for $51,248. Upon receipt, Soninique deposits each coupon and the redemption amount in an account earning 6%. Find the lowest yield that Dominique may receive during the ten-year period and also the highest.
Answer: Lowest 6.89884. Highest: 7.20108 Please show work without using excel spread sheet since during test I am only able to use a basic calculator. I already have part a solved so do not need assistance with that. Only part b.

Explanation / Answer

Lowest yield:

A bond yield is the amount of return an investor will realize on a bond. Though several types of bond yields can be calculated, nominal yield is the most common. This is calculated by dividing amount of interest paid by the face value.

Price of Bond = $51,248

Coupon amount = $4000 ($50,000 * 8%)

Period = 10 years

Reinvestment rate = 6%

Step1: Calculation of future value of Coupons:

FV = PV (+I) n

FV = $4000(1+0.6)0 + $4000(1+0.6)2 +…..+$4000(1+0.6)5

FV = $4000 + $4240 + ……

FV = $27,901

Step 2: Calculation of PV of Coupons

PV = FV / (1+i) n

PV = $27,901 / 0.63017

PV = $17,582

Step 3:

Yield = Coupon / Price of bond

Yield = $17,582 / $51,248

Yield = 0.03431 * 2

Yield = 0.06862 or 6.862

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

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