Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at
ID: 2806870 • Letter: G
Question
Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5% (10 points).
What is the current price of the bonds, given that they now have 19 years to maturity?
What is the bond expected current yield?
What is the bond expected capital gain yield?
What is the expected price one year from today if the market interest rate does not change?
What is the expected price four years from today if the market interest rate does not change?
Explanation / Answer
1) Current market price = Interest*PVIFA(5.5%,19) + Redemption value*PVIF(5.5%,19th year)
=75*11.60765 + 1000*0.3616
=870.6 + 361.6
=1232.2$
2)Current yield = interest/CPM
=75/1232.2 = 6.087%
3) Expected capital gain yield = 1232.2-1000/1000
=232.2/1000
=23.22%
4) market price after 1 year = Interest*PVIFA(5.5%,18) + Redemption value*PVIF(5.5%,18th year)
=75*11.2461 + 1000*0.3815
=843.46 + 381.5
=1224.96$
5) market price after 4 year = Interest*PVIFA(5.5%,15) + Redemption value*PVIF(5.5%,15th year)
=75*10.0376 + 1000*0.4479
752.82+447.9
=1200.72$
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