Question

1. Price of a bond today: your company wants to raise $600 million by selling bonds. The company has chosen to issue 25-year semi-annual $1,000 par value bonds with a coupon of 5.5%, rated at BBB with yield of 6.5%.

a. What will be the price of each bond? Show calculator inputs, fully labeled.

b. How many bonds will the company need to sell? Show work.

c. What cash flows does an investor in this bond receive while she owns it? What will she earn as a rate of return if she holds it until maturity? Show the timeline of the investor’s cash flows.

2. Holding Period Return of the bond in Question #1: You became an investor in this bond just before the recession began. During the recession interest rates fell to stimulate the economy. It is now 6 years later, after you have bought the bond. The yield on your bond has fallen to 4.5% p.a.

a. What is the price of your bond now? Show calculator inputs, fully labeled.

b. What did you earn per year over the past 6 years on this bond if you sell the bond today? Compare to expected yield to maturity. Show calculator inputs, fully labeled. Show a timeline of your cash flows over time.

Answer 1

1)

a)