Question

7.

A) As with most bonds, consider a bond with a face value of $1,000. The bond's maturity is 27 years, the coupon rate is 14% paid annually, and the market yield (discount rate) is 5%. What should be the estimated value of this bond in one year? Assume the market yield remains unchanged. Enter your answer in terms of dollars, rounded to the nearest cent.

B) As with most bonds, consider a bond with a face value of $1,000. The bond's maturity is 8 years, the coupon rate is 13% paid annually, and the market yield (discount rate) is 4%. What is the bond's Current Yield? Enter your answer as a percentage.

Answer 1

Sol

A)

Face value = $1000

Period (nper) = 27 years, Estimated value of this bond in one year so Period will be 27 - 1 = 26 years

Coupon rate = 14%

PMT = Annual coupon payment = 1000 x 14% = 140

Market yield (r) = 5%

Face value	1000
nper	26
PMT	140
Market yield	5%
PV	$2,293.77

Estimated value of this bond in one year is $2,294

B)

Face value = $1000

Period (nper) = 8 years

Coupon rate = 13%

PMT = Annual coupon payment = 1000 x 13% = 130

Market yield (r) = 4%

Face value	1000
nper	8
PMT	130
Market yield	4%
PV	$1,605.95
Current yield	8.09%

Therefore current yield of the bond is 8.09%

Workings