Question

1. High Country Marketing Corp. issues a corporate bond that has a 10-year maturity with a par value of $1,000 and pays interest semiannually. The quoted coupon rate is 6%.

   (a) If the required rate of return on this bond is 8% per year. What should the issuing price be?   (b) The bond is callable in 3 years at 110% of par. What is the bond’s yield to call?   (c) Currently, the bond is having an ask price of $998.91, and the last coupon was paid 35 days ago. What is the the invoice price of the bond? For simplicity, assume there are 360 days in a year.

Answer 1

Solution:

a)Calculation of issue price of bond

Issue price of bonds is the present value of annual coupon and its maturity value.Issue price is calculated as follow;

=($1000*6%)*Present value of annuity factor@8% for 10 years+Maturity value/(1+0.08)^10

=$60*6.7100814+$1000/(1+0.08)^10

=$865.80

Issue price of bond is $865.80

b)Calculation of Yield to maturity(YTC)

YTC=Annual Coupon+(Call price-Price of bonds)/years to call/(Call price+Price of bonds)/2

=[$60+(1100-865.80)/3]/(1100+865.80)/2

=138.07/982.90

=0.1405 or 14.05%.

c)Calculation of Invoice price

Since 35 days have passed since last coupon paid,hence there is accrued interest for 35 dyas,which is calculated as follow;

Accrued Interest=(Annual coupon/2)*Days since last coupon payment/days separating coupon payment

=($60/2)*35/180

=$5.83

Invoice Price=Ask Price+Accrued Interest

=$998.91+5.83

=$1004.74