Question

Company A issued 10-year bonds one year ago at par. Each of these bonds had $1,000 face value and had a coupon rate of 4.25% per year, with semi-annual coupon payments. Company A's credit risk hasn’t changed, but the market has—and now 10-year corporate bonds with similar risk are being issued with a yield-to-maturity of 3.75% per year.

One year ago, what was the required rate of return on these bonds?

What is your best guess of the current required rate of return on these bonds? State your assumptions.

Based on your answer to b), what is your best guess of the current market price of one of these bonds? You may assume that the second coupon payment occurred a moment ago, so that the next coupon payment is six months away.

Answer 1

	a)	Required rate of return one year ago	4.25%
		(Because it was issued at far)
	b)	Current required return	3.75%
		Because bonds of similar risk is issued at YTM 3.75%
		YTM=Yield to Maturity
	c)	Current Market Price=Present Value of future cash flows
	Rate	Semi annual Yield =(3.75/2)%=	1.875%
	Nper	Number of semi annual periods to maturity=9*2=	18
	Pmt	Semi annual coupon amount =(1000*4.25%)/2	$21.25
	Fv	Amount to be received at maturity	$1,000
	PV	Current Market Price	$1,037.90
		(Using PV function of excel)
		Estimated Current Market Price	$1,037.90