Question

1. Find the price of a bond. The time is today. The $1,000 par value corporate bond you are interested in has a 5% coupon rate, paid semi-annually. The maturity of the bond is 20 years. The rating agencies have determined that this company should have a B+ rating, making its yield be 6%. Show a time line of these cash flows.   What is the price you will have to pay for the bond?

N                I                 PV              PMT           FV

2. Same bond as Q#1: 5 years have passed. Interest rates have decreased due to the recession that just ended, and your company is actually stronger in its cash flows. The rating agencies have given the company an A- rating, so the yield on its bonds is now 4%. Show a time line of these cash flows.   What is the price of the bond now?

N                I                 PV              PMT           FV

3. If you sell your bond today (because the recession is over, and you want to move into stocks) what HAS BEEN your rate of return per year on the bond you have held for the past 5 years? This is your holding period return or HPR. Do a time line of the cash flows.   

N                I                 PV              PMT           FV

4. You bought a stock for $100. The first year the stock’s dividends were $2.00 per share, paid out quarterly. Then the stock raised the dividends in the second year to $4.00 per share, paid quarterly. Now, two years later, the stock is selling for $150 per share.

Show a time line of these cash flows. Use the CASH FLOW key on your calculator. Solve for IRR, which will be quarterly. Annualize your rate of return.

Answer 1

1) use pv formuale
=pv(rate,nper,pmt,fv,type)
=pv(6%/2,20*2,(1000*5%/2),1000,0)
=884.43

2)here the nper changes and it is noe=(20-5)*2=30 and rate=4%/2
=pv(4%/2,30,(1000*5%/2),1000,0)
=1111.98

3)use rate formuale in excel here
=rate(nper,pmt,pv,fv,type)
=rate(10,50,-884.43,1111.98,0,1)
=7.47%
annualized return=7.47%*2=14.94%

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