5. The valuation of bonds Aa Aa Booker Petroleum Refiners (BPR) has an issue of
ID: 2819599 • Letter: 5
Question
5. The valuation of bonds Aa Aa Booker Petroleum Refiners (BPR) has an issue of 10-year, 6% annual coupon bonds outstanding. The bonds, which were originally issued 20 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 6%, and are noncallable. What is the current market price of BPR's bonds? O $1,100.00 o $1,000.00 O $850.00 $1,250.00 Are the bonds of Booker Petroleum Refiners selling at a discount, at par, or at a premium? O Par O Premiunm O Discount What is the current yield on Booker Petroleum Refiners's outstanding bonds? 4.80% o 7.06% 5.45% 6.00% What is the expected one-year capital gain yield on the bonds of Booker Petroleum Refiners? 9.00% 0 6.00% 0.00% 12.00%Explanation / Answer
1.
Correct option is > $1,000
Using financial calculator BA II Plus - Input details:
#
I/Y = R = Rate or yield / frequency of coupon in a year =
6.000000
PMT = Coupon rate x FV / frequency =
-$60.00
N = Number of years remaining x frequency =
10
FV = Future Value =
-$1,000.00
CPT > PV = Present value of bond = Price of Bond =
$1,000.00
Formula for bond value = |PMT| x ((1-((1+R%)^-N)) / R%) + (|FV|/(1+R%)^N)
$1,000.00
2.
Correct option is > Par
The face value of bond is equal to Price of the Bond.
Face value = Par value and Par value = Price hence bond is at Par
3.
Correct option is > 6.00%
Current yield = Coupon or PMT / Present value = 60 / 1000 = 6.00%
4.
Correct option is > 0.00%
Capital gain yield = YTM - Current yield
Capital gain yield = 6.00% - 6.00% = 0.00%
Using financial calculator BA II Plus - Input details:
#
I/Y = R = Rate or yield / frequency of coupon in a year =
6.000000
PMT = Coupon rate x FV / frequency =
-$60.00
N = Number of years remaining x frequency =
10
FV = Future Value =
-$1,000.00
CPT > PV = Present value of bond = Price of Bond =
$1,000.00
Formula for bond value = |PMT| x ((1-((1+R%)^-N)) / R%) + (|FV|/(1+R%)^N)
$1,000.00
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