Question

What is the price of a 2-year bond if the coupon is 9% and the yield is 7.2%?

Now assume that there is a 5% chance that the company which issued the bond will go bankrupt in 2 years. If they go bankrupt, you will receive only 50 cents for every dollar of principal or coupon in the second year. What is the price assuming a 7.2% discount rate? What risk-less yield-to-maturity does that price imply?

You forecast that your mail-order business can bring in $15,000/year starting in 7 years and going on forever. Assuming a 14% discount rate, how much is this worth?

Answer 1

Solution:

1.Calculation of price of bond:

Price of bond is the Sum of present value of coupon amount expected on bond and its maturity value.In the given case face value ob bond is not given,so we need to caluclate bond's price assuming face value of bond is $1000

Annual Coupon amount=$1000*9%=$90

Discount rate=7.2% or 0.072

Maturity value(Face value)=$1000

Maturity period= 2 years

Coupon will be paid for 2 years and bond will be redeemed at the end of 2 year.Thus

Price of bond=$90/(1+0.072)^1+$90+$1000/(1+0.072)^2

=$1032.45