Question

5. (a) Consider a bond issued 10years ago with an at-issue time to maturity of 30 years. The bond’s coupon rate is 8 percent and it currently trades in the bond market for 109. Assuming a par value of US$ 1,000, what is the bond’s current time to maturity, semi-annual interest payment, and bond price in dollars (US)?

(b). Consider 15-year bond that has a 5.5 percent coupon, paid semi-annually. If the current market interest rate is 6.5 percent and the bond is priced at US $940, should you buy the bond?

(C). What are the cash flows associated with a bond?

D). what is the indenture? What are protective covenants? Give some examples.

Answer 1

As per rules I am answering the first 4 subparts of the question

a:

1: Current time to maturity = 30 years – 10 years = 20 years

2: Semi annual Interest =Coupon rate * Face value /2 =

8%*1000/2 = $40

3: Bond price = Face value * 109/100

= 1000*109/100

=1090

b:

4: Using financial calculator

Input: FV= 1000

N = 15*2 = 30

PMT = 5.5%*1000/2 = 27.5

I/Y = 6.5/2 = 3.25

Solve for PV as 905.09

Hence the price should be $905.09

Since it is trading at a higher price, do not buy the bond.