Question

28.You purchase a Chrysler bond with a par value of $1,000 that carries a semi-annual coupon rate of 4%, has a 5-year maturity and sells at par. (7 points)

a.What will be the bond’s price one year later if the YTM has decreased by 1%?

b.If you sell the bond at the price (a) above, what was is your HPR (Holding Period Return)? Round your answer to two (2) decimal places.

29.The Nickelodeon Manufacturing Corp. has a series of $1,000 par value bonds outstanding. Each bond pays interest (coupon payment) semi-annually and carries an annual coupon rate of 6%. Some bonds have a maturity date of 4 years and some have a maturity date of 10 years. If the YTM is 10%, what is the current price of: (12 points) Round your answers to two decimal points:

a.The bonds with 4 year maturity

b. The bonds with 10 year maturity

c.Are the bonds selling at a discount, at par, or at a premium? Briefly explain.

d.Which of the bonds has a higher selling price under the current market conditions? Briefly explain.

Answer 1

28 a) Bond Price can be calculated using PV function

N = 5 x 2 = 10, PMT = 4% x 1000 / 2 = 20, FV = 1000, I/Y = 3%/2 = 1.5%

=> Compute PV = $1,046.11 is the bond price.

b) HPR = (Current Price + Coupon) / Old Price - 1 = (1046.11 + 20 x 2) / 1000 - 1 = 8.61%

29) a) N = 4 x 2 = 8, PMT = 6% x 1000 / 2 = 30, FV = 1000, I/Y = 10%/2 = 5% => Compute PV = $870.74 is the bond price of 4 year maturity

b) N = 10 x 2 = 20, PMT = 30, FV = 1000, I/Y = 5% => Compute PV = $750.76 is price of 10 year maturity.

c) Bonds are selling at discount as their current price are below the par value of $1000.

d) The bond with 4 year maturity has a higher selling price because it has lower maturity than the other bond.