5. The valuation of bonds Aa Aa Muster! Manufacturing Corporation (MMC) has an i

Question

5. The valuation of bonds Aa Aa Muster! Manufacturing Corporation (MMC) has an issue of 7-year, 8% annual coupon bonds outstanding. The bonds, which were originally issued 15 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 10%, and are noncallable. What is the current market price of MMC's bonds? O $1,128.29 O $992.89 O $767.24 O $902.63 Are the bonds of Musterl Manufacturing Corporation selling at a discount, at par, or at a premium? O Discount O Premium O Par What is the current yield on Musteri Manufacturing Corporation's outstanding bonds? 8.86% 7.09% 8.06% 10.43% is the expected one-year capital gain yield on the bonds of Musterl Manufacturing Corporation 0.91% 1.03% 1.34% 1.14%

Explanation / Answer

1 No of yrs 7 Coupon rate 8% Coupon Amt 80 1000*8% YTM 10% Value of Bond = Present value of coupon payment + Present value of par value Using the PV function in excel, we can calculate the value of bond ($902.63) PV(10%,7,80,1000) Current Market Price of MMC's bond is $ 902.63 2 The market price is less than par value, hence the bonds are selling at discount 3 Current Yield = Annual Interest Payment/Current Bond Price 80/902.63 8.86% 4 Capital Gain Yield = YTM - Current yield 10%-8.86% 1.14%

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