5. A tem-year corpoate bond has a 7 percent coupon rate. What should be the bond

Question

5. A tem-year corpoate bond has a 7 percent coupon rate. What should be the bond's price today if the required return is 8 percent and the bond pays interest annually? Face value $1,000 A. $932.05 B. $901.82 c $1,243.33 D. $932.90 E. $1,000.00 6. A corporate bond has a coupon rate of 10 percent, a required return of 8 percent, and a face value of $1,000. This bond's price is: A. Less than $1,000 B. More than $1,000 C. $1,000 D. $920 E. not possible to determine from the information given. 7. Aten-year bond has a 6% coupon rale (paid seniannually, a current price orsi,015.00, a face value of $1,000. What is the bond's YTM? A. 2.70% B, 5.87% C. 290% D. 5.40% 0352 A E.5.80% 8. You are trying to compare the price sensitivity of two bonds. Bond A is a zero-coupon bond with four years remaining until maturity. Bond B is a coupon bond with four years remaining until maturity. Which bond has the higher price sensitivity? A. Bond A B. Bond B C. Both bonds have same price sensitivity D. Impossible to tell with information given 12 8

Explanation / Answer

The present value of the face value (i.e. the maturity value) is calculated as follows:

Therefore, the price of a bond is given by the following formula:

Where,

C = Coupon Rate

F = Face Value

r = required rate

t = time period

So,

Price of Bond = 70*((1-(1+0.08)^-10))/0.08 + 1000/(1/1+0.08)^10

= 932.90

6) Since the coupon rate (10%) is more than the required rate of return (8%) for a bond with face value of $1000, the price of bond will be more than $1000.

It can be calcuted as below:

Price of Bond = 100*((1-(1+0.08)^-10))/0.08 + 1000/(1/1+0.08)^10

= 1134.20

5) Present Value of Interest Payments = c × F × 1 (1 + r) -t r

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