Question

Eon Satellite Corporation (ESC) has an issue of 5-year, 9% annual coupon bonds outstanding. The bonds, which were originally issued 15 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 12%, and are noncallable. What is the current market price of ESC’s bonds?

$1,114.83

$891.86

$758.08

$981.05

Are the bonds of Eon Satellite Corporation selling at a discount, at par, or at a premium?

Par

Premium

Discount

What is the current yield on Eon Satellite Corporation’s outstanding bonds?

10.09%

11.87%

8.07%

9.17%

What is the expected one-year capital gain yield on the bonds of Eon Satellite Corporation?

1.53%

1.91%

2.25%

1.73%

Answer 1

1)

Coupon = 0.9 * 1,000 = 90

Price of bond = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Price of bond = 90 * [1 - 1 / (1 + 0.12)⁵] / 0.12 + 1000 / (1 + 0.12)⁵

Price of bond = 90 * 3.604776 + 567.426856

Price of bond = $891.86

Keys to use in a financial calculator: FV 1000, PMT 90, N 5, I/Y 12, CPT PV

2)

Discount

Discount as price is less than the face value

3)

Current yield = (Coupon / price) * 100

Current yield = (90 / 891.86) * 100

Current yield = 10.09%

4)

Price after 1 year =

Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Price of bond after 1 year = 90 * [1 - 1 / (1 + 0.12)⁴] / 0.12 + 1000 / (1 + 0.12)⁴

Price of bond after 1 year = 90 * 3.037349 + 635.518078

Price of bond after 1 year = $908.879488

One year capital gain yield = [(908.879488 - 891.86) / 891.86] * 100

One year capital gain yield = 1.91%