Question

1) One year ago, ShopFast issued 15-year annual bonds at par. The bonds had a coupon rate of 6.5 percent and had a face value of $1,000. Today, the applicable yield to maturity to ShopFast’s bonds is 7%. What was the change in price in ShopFast’s bonds from last year to today? A) -55.56t B) 51.94 C) -$43.73 D) 58.71 E) The bond price did not change.

2) WallStores needs to raise $2.8 million for expansion. The firm wants to raise this money by selling 20-year, zero-coupon bonds with a par value of $1,000. The market yield on similar bonds is 6.49 percent. How many bonds must the company sell to raise the money it needs? Assume annual compounding. A) 9,847 bonds B) 11,144 bonds C) 12,800 bonds D) 10,508 bonds E) 11,315 bonds

Answer 1

1.
Last year Bond price = $1,000

Calculation of current price of the bond:

FV = 1000
PMT = 1000 * 6.5% = 65
Nper = 14
Rate = 7%

Current price of the bond can be calculated by using the following excel formula:
=PV(rate,nper,pmt,pv,fv)
=PV(7%,14,-65,-1000)
= $956.27

Change in price = $956.27 - $1000 = -$43.73

2.
FV = 1000
Nper = 20
Rate = 6.49%
PMT = 0

Price of the bond can be calculated by using the following excel formula:
=PV(rate,nper,pmt,pv,fv)
=PV(6.49%,20,0,-1000)
= $284.33

Number of Bonds to be issued = $2,800,000 / $284.33 = 9,847 bonds