Explore BrainMass

Explore BrainMass

    A 20-year bond with a 7.50% semi-annual coupon bond

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Please help with the attached file.

    I. A 20-year bond with a 7.50% semi-annual coupon bond was sold at par 10 years ago. Now the 10-year semi-annual payment corporate bond has a required return (or YTM) of 8.25%. Calculate the bond's market price. The par level of bonds is $1000.
    II. a) What is the duration of a 2-year bond with an 8.5% semi-annual coupon and a required return (YTM) of 8.00%?
    b)What is the duration of a 20-year zero-coupon bond with a required return (YTM) of 8.00%?
    c)You expect a sudden decrease in market rates due to a macroeconomic change. Would you rather have in your portfolio the item from a) above or b) above?
    Which item would you prefer, and specifically explain the reasons why?

    © BrainMass Inc. brainmass.com June 3, 2020, 9:09 pm ad1c9bdddf
    https://brainmass.com/business/bond-valuation/168670

    Attachments

    Solution Preview

    I. A 20-year bond with a 7.50% semi-annual coupon bond was sold at par 10 years ago. Now the 10-year semi-annual payment corporate bond has a required return (or YTM) of 8.25%. Calculate the bond's market price. The par level of bonds is $1000.
    We need to calculate how much the bonds have been issued by using the formula as follows: -

    where B is the issued price
    C is the coupon payment
    r is the current interest rate
    n is the period

    Since the bond issues 10 years ago, its remaining life is 10 years. You need to multiply the remaining life by 2 because the company pays interest semiannually.
    Coupon payment is equal to $1,000 x 7.5% = 75/2 = $37.50
    The current interest ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what is the duration of a 2-year bond with an 8.5% semi-annual coupon and a required return (YTM) of 8.00%, what is the duration of a 20-year zero-coupon bond with a required return (YTM) of 8.00%, would you rather have in your portfolio the item from a) or b), and which item would you prefer, and specifically explain the reasons why.

    $2.19

    ADVERTISEMENT