Great Plains Corporation issued a 15-year 10% bond exactly eight years ago. (a)
ID: 2812326 • Letter: G
Question
Great Plains Corporation issued a 15-year 10% bond exactly eight years ago.
(a) If you bought $1000 of this bond exactly two years ago when the yield-to-maturity was 10%, how much did you pay?
(b) If the yield-to-maturity is 8.05% now, and the next coupon is in exactly six months, what is the value of the bond today?
(c) If you sold the bond today at that price, what would be your capital gain or loss expressed as an EAR?
(d) If in three years from now the bond price is $923, what would be the yield-to-maturity at that point, expressed as an APR with semi-annual compounding? To solve this you can use Excel IRR or goal seek function or a financial calculator etc.
Explanation / Answer
a)
Since coupon rate is equal to YTM, it would be bought at par. Hence bought at $1,000
b)
n=14
rate =0.0805/2
fv=1000
Pmt=50
=PV(0.0805/2,14,50,1000)
=$1,102.82
c)
Capital gain = ((1102.82/1000)^(1/8))-1=1.23%
d) After 3 years:
n=8
PV=-923
PMT=50
FV=1000
Using excel function:
=RATE(8,50,-923,1000)
=12.50%
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