Question

Your broker faxed to you the following information about two annual coupon bonds that you are considering as a potential investment. Unfortunately, your fax machine is blurring some of the items, and all you can read from the fax on the two different bonds is the following:

Features IBM Coupon Bond AOL Coupon Bond

Face value $1,000 $5,000

Coupon rate 10.5% ?

Yield to maturity 11.5% 5.5%

Years to maturity 30 25

Price ? $5,335.35

Answer #1

Let Number of periods = n

Yield I/Y= r

Annual Payment = P

Face Value = FV

Hence, PV = P/(1+r) + P/(1+r)^{2} + .... +
P/(1+r)^{n} + FV/(1+r)^{n} = P[1 -
(1+r)^{-n}]/r + FV/(1+r)^{n}

For IBM Bond,

n = 30

r = 11.5%

P = 10.5% of 1000 = $105

FV = 1000

=> PV = P[1 - (1+r)^{-n}]/r + FV/(1+r)^{n} =
105[1 - (1+0.115)^{-30}]/0.115 +
1000/(1+0.115)^{30} =$916.36

For AOL Bond

n = 25

r = 5.5%

P = ?

FV = 5000

=> PV = 5335.35

PV = P[1 - (1+r)^{-n}]/r + FV/(1+r)^{n}

=> 5335.35 = P[1 - (1+0.055)^{-25}]/0.055 +
5000/(1+0.055)^{25}

=> P = 300

Hence, Coupon Rate = 300/5000 *100% = 6%

Missing information on a
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quarterlyquarterly
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LOADING...
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LOADING...
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