Question

A 6% annual coupon bond has 11 years remaining until maturity. Par value is $1000. |

The required rate of return (yield to maturity)on the bond is 8.5%. |

Compute the price of the bond today using the appropriate Excel formula |

Compute the price of the same bond if it has 10 years remaining to maturity instead of 11. |

What is the capital gains yield on the bond? |

What is the current yield on the bond? |

What is the total yield on the bond? |

What will the bond's price be at the instant before it matures? |

Answer #1

**Bond Price:**

It refers to the sum of the present values of all likely coupon
payments plus the present value of the par value at maturity. There
is inverse relation between Bond price and YTM ( Discount rate )
and Direct relation between Cash flow ( Coupon/ maturity Value )
and bond Price.

Price of Bond = PV of CFs from it.

Part A:

Year |
Cash Flow |
PVF/ PVAF @8.5
% |
Disc CF |

1 - 11 | $ 60.00 | 6.9690 | $ 418.14 |

11 | $ 1,000.00 | 0.4076 | $ 407.64 |

Bond
Price |
$
825.78 |

As Coupon Payments are paid periodically with regular intervals,
PVAF is used.

Maturity Value is single payment. Hence PVF is used.

What is PVAF & PVF ???

PVAF = Sum [ PVF(r%, n) ]

PVF = 1 / ( 1 + r)^n

Where r is int rate per Anum

Where n is No. of Years

How to Calculate PVAF using Excel ???

+PV(Rate,NPER,-1)

Rate = Disc rate

Nper = No. of Periods

Part B:

Year |
Cash Flow |
PVF/ PVAF @8.5
% |
Disc CF |

1 - 10 | $ 60.00 | 6.5613 | $ 393.68 |

10 | $ 1,000.00 | 0.4423 | $ 442.29 |

Bond
Price |
$
835.97 |

As Coupon Payments are paid periodically with regular intervals,
PVAF is used.

Maturity Value is single payment. Hence PVF is used.

What is PVAF & PVF ???

PVAF = Sum [ PVF(r%, n) ]

PVF = 1 / ( 1 + r)^n

Where r is int rate per Anum

Where n is No. of Years

How to Calculate PVAF using Excel ???

+PV(Rate,NPER,-1)

Rate = Disc rate

Nper = No. of Periods

Part C:

**Total Yield:**

**YTM :**

It is already given as 8.5%.

Part D:

Current yield = Coupon Amount / Price

= $ 60 / $ 825.78

= 0.0727 I.e 7.27%

Part E:

Capital gain yield = Total Yield - Current Yield

= 8.5% - 7.27%

= 1.23%

Part F:

Before Maturity Price of Bond = Coupon Amount + Maturity Value

= $ 60 + $ 1000

= $ 1060

an 11% coupon bond paying interest semiannually has a $1000 par
value and 15 years remaining until maturity. with its current
BB(Ba) rating, the bond has been priced to provide a yield to
maturity of 8.75%. But, that rating is expected to be revised to
BBB(Baa), which would cause the YTM to change by 75 basis points.
If that happens, the bond price should ______ by
$_______
a.rise,73.40
b.fall, 73.40
c.fall,80.13
show calculations for calculator with formula

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End of Year
4
5
6
Call price
103
102
100
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this bond is selling at a premium and the price will increase
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this bond is selling at a premium and the price will increase
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b
this bond is selling at a premium and the price will decrease
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c
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