Question

Q4. FYI bonds have a par value of $1,000. The bonds pay $40 in interest every six months and will mature in 10 years.

a. Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively.

b. Explain the impact on price if the required rate of return decreases.

c.   Compute the coupon rate on the bonds. How does the relationship between the coupon rate and the yield to maturity determine how a bond's price will compare to it par value?

                                                          Explain excel formula

Answer 1

Q4. Par Value =1000
Number of Periods =10*2 =20
Interest =40
a. Semi annual YTM =7%/2 =3.5%
Price at YTM of 7% Using excel formula
=PV(3.5%,20,-40,-1000) =1071.06

Semi annual YTM =9%/2 =4.50%
Price at YTM of 9% Using excel formula
=PV(4.5%,20,-40,-1000) =934.96

Semi annual YTM =8%/2 =4%
Price at YTM of 8% Using excel formula
=PV(4%,20,-40,-1000) =1000.00

b. The price increases as required rate of bond decreases.

c. Coupon rate of Bond =2*Coupon/Par Value =2*40/1000 =8%
If coupon rate is greater than YTM then price of bond is at premium. This Price is above Par.
If coupon rate is less than YTM then price of bond is at discount. This Price is below Par.