12:33 PM elearn.uta.edu .ill AT&T; FINA 2330 - Money, Finance, and the Modern Co
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12:33 PM elearn.uta.edu .ill AT&T; FINA 2330 - Money, Finance, and the Modern Consumer Bond Markets Homework Assignment 4 (30 points) Please solve the following problems using either TVM formulas or the financial calculator. Show all your formula work. If you use the calculator, show the relevant calculator inputs. Where MS Excel is required, please either cut and paste the spreadsheet where it belongs or staple the printout directly from MS Excel. For spreadsheets that are too long to print, just include a sample printout of the first and last pages. Always highlight or underline the final answer to each question. Note that some questions require a written answer, not just :a number . A 10-year bond is issued with a face value of S1,000 paying interest of S60 a year. If market yields increase shortly after the bond is issued, what happens to the bond S a) Coupon Rate? b) Price? c) Yield to maturity? 2. A $1,000 face value bond with a coupon rate of 8% is selling at a price of S970. Is the bond's yield to maturity more or less than 8%? Why? 3. The bonds of XYZ, Inc. pay an annual coupon rate of 10% and have 12 years to maturity. If investors' required rate of return is now 8% on these bonds a) Will the bonds be seing at a premium or a discount with respect to their $1,000 face value? Why? b) What is the fair price of the bonds? 4, General Electric's 30-year bonds have a 7.5% annual coupon rate and a par value of S10,000. If their required rate of return is 6.25% per year, what should the price of their bonds be? The bonds of ABC Corp. have an 11% annual coupon rate. Interest is paid semi-annually. The bonds have a par value of S100,000 and will mature 15 years from now. If the (annual) required rate of return is 9%, what is the price of ABC's bonds [Hint: you need to convert yourExplanation / Answer
1.
a) Coupon rate would be the same as before ( =$60 the yearly interest rate as it is the same thing as annual coupon payments) as it is based solely on the face value of the bond which in turn is independent of the market yield rate.
b) If market yields increase the spot discounting rate used to discount each annual coupon cash flow of $60 will go up. This would imply a decline in the present value of each of these coupon cash flows and hence the overall price of the bond because the same is equal to the sum of the present value of all the annual coupon cash flows and the par value.
c) Yield to Maturity is the effective annual yield earned on the bond if it is held to maturity with the assumption that all intermediate cash flows ( annual coupon payments) prior to maturity are reinvested at the Yield to Maturity Rate. If market yield goes up, price will go down and since coupon cash flows and par value discounted at Yield to Maturity give the aprrox price, Yield to Maturity will also go up.
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