Bond questions
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1. Determine the current market prices of the following $1,000 bonds if the comparable rate is 10% and answer the following questions.
XY 5.25%, (interest paid annually) for 20 years.
AB 14 %, (interest paid annually) for 20 years.
a. Which bond has a current yield that exceeds the yield to maturity?
b. Which bond may you expect to be called? Why?
c. If CD, Inc. has a bond with a 5¼ percent coupon and a maturity of 20 years but which was lower rated, what would be its price relative to the XY, Inc., bond? Explain.
2. You purchase a bond for $875. It pays $80 a year (that is, the semiannual coupon is 4%), and the bond matures after 10 years. What is the yield to maturity?
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The solution explains some bond questions relating to current market price, current yield, YTM, when will it be called
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1. The current price of the bonds would be the present value of interest and principal discounted at the rate of 10%. Interest is an annuity and so we would use the PVIFA table to get the PV factor. For principal amount which is a lump sum we would use the PVIF table.
Bond XY - Annual interest is $52.5, par value is $1,000, maturity is 20 years and the discounting rate is 10%
Price of XY = 52.5 X PVIFA (10%, 20) + 1,000 X PVIF (10%, 20)
Price of XY = 52.5 X 8.5136 ...
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