A bond of the Eastold Corporation pays an 11% coupon and has a $1000 par value.

Question

A bond of the Eastold Corporation pays an 11% coupon and has a $1000 par value. The coupon is paid semi-annually (twice a year). The bond matures in 10 years. The market's required yield to maturity on a comparable-risk bond is 9%.

a. Calculate the value of a bond. (8p)

b. How does the value change if the market's required yield to maturity increases to 12%?(8p)

c. How does the value change if the market's required yield to maturity decreases to 6%?(8p)

d. d) Interpret your findings in parts a), b)and c).(4p)

Explanation / Answer

Yield To Maturity = Coupon+ FV-BV/n/FV+BV/2 Coupon = 1000*11% /2 = 55 n = 10*2 = 20 1650 .045= 55+1000-X /20 //1000+X /2 .045 = 1100+1000-x/10000+10x 450+.45 = 2100-X X = 1650/1.45 X = 1137.931034 Value of the bond is $ 1138 ii) If yield is 12% i.e. 6% Semi annual .06= 55+1000-X /20 //1000+X /2 600+.60= 2100-x X = 1500/1.6 X = 937.5 Price of the bond is $ 938 iii) If yield is 6% i.e. 3% semiannually .03= 55+1000-X /20 //1000+X /2 300+.30= 2100-X X = 1800/1.3 X = 1384.615385 The value of the bond will be $ 1385 As yield to maturity increases the value of the bond decreases and vice versa

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