Question

Consider an annual coupon bond with a face value of $100, 12 years to maturity, and a price of $76. The coupon rate on the bond is 6%. If you can reinvest coupons at a rate of 5% per annum, then how much money do you have if you hold the bond to maturity?

Answer #1

Ans :

Years | Interest | Future value = interest * future vale factor | Calculation |

1 | 6 | 10.26203615 | 6*(1.05)^11 |

2 | 6 | 9.773367761 | 6*(1.05)^10 |

3 | 6 | 9.307969296 | 6*(1.05)^9 |

4 | 6 | 8.864732663 | 6*(1.05)^8 |

5 | 6 | 8.442602536 | 6*(1.05)^7 |

6 | 6 | 8.040573844 | 6*(1.05)^6 |

7 | 6 | 7.657689375 | 6*(1.05)^5 |

8 | 6 | 7.2930375 | 6*(1.05)^4 |

9 | 6 | 6.94575 | 6*(1.05)^3 |

10 | 6 | 6.615 | 6*(1.05)^2 |

11 | 6 | 6.3 | 6*(1.05)^1 |

12 | 6 | 6 | 6*1 |

Total interest that would be received when invested at 5% = 95.50

Face value amount that would be received at maturity = 100

Total money at maturity = 195.50

Note 1 : future value factor calculation

(1.05)^11 | 1.710339 |

(1.05)^10 | 1.628895 |

(1.05)^9 | 1.551328 |

(1.05)^8 | 1.477455 |

(1.05)^7 | 1.4071 |

(1.05)^6 | 1.340096 |

(1.05)^5 | 1.276282 |

(1.05)^4 | 1.215506 |

(1.05)^3 | 1.157625 |

(1.05)^2 | 1.1025 |

(1.05)^1 | 1.05 |

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Question 5
Bond Features
Face Value = $1,000
Coupon Rate = 5.00%
Maturity in Years = 10
Annual Coupons
The bond can be called in year 6
The market interest rate in year 6 = 3.00%
The call price is equal to $1,050
How much would the company save or lose if it calls the bond in
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save $22.64
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save $25.32
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save $25.07

Use the bond term's below to answer the question
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Coupon Rate 7%
Face value $1,000
Annual Coupons
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The call price is $1,050
The interest rate in period 3 is 9%
If the firm calls back the bond, how much does it save or lose?
-$147
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