Question

Rick bought a 20-year bond when it was issued by Macroflex Corporation 5 years ago (NOTE: the bond was issued 5 years ago. In calculating price today, remember it has only 15 years remaining to maturity). The bond has a $1,000 face value, an annual coupon rate equal to 7 percent and the coupon is paid every six months. If the yield on similar-risk investments is 5 percent,

a. What is the current market value (price) of the bond?

b. Suppose interest rate levels rise to the point where such bonds now yield 9 percent. What would be the price of Macroflex bond? c. At what price would Macroflex bonds sell if the yield on them was 7 percent?

d. What do you observe regarding the relationship between interest rate (YTM) bond’s price?

e. What do you observe regarding the relationship between coupon, YTM and the bond’s price?

PLEASE SHOW ALL WORK

Answer 1

Price=Coupon rate*Par value/yield*(1-1/(1+yield/2)^(2*t))+Par value/(1+yield/2)^(2*t)

1.
=1000*7%/5%*(1-1/(1+5%/2)^(2*15))+1000/(1+5%/2)^(2*15)
=1209.302926

2.
=1000*7%/9%*(1-1/(1+9%/2)^(2*15))+1000/(1+9%/2)^(2*15)
=837.1111146

3.
=1000*7%/7%*(1-1/(1+7%/2)^(15*2))+1000/(1+7%/2)^(2*15)
=1000

4.
If ytm increases, bond price decreases

5.
If coupon rate is more than ytm, bond will sell for more than par
If coupon rate is less than ytm, bond will sell for less than par
If coupon rate is equal to ytm, bond will sell for par