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Estimating the current value and YTM in the given cases

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Assume Venture Healthcare sold bonds that have a 10-year maturity, a 12% coupon rate with annual payments, and a $1,000 par value. Suppose that two years after the bonds were issued, the required interest rate fell to 7%. What would be the bonds value? Suppose that two years after the bonds were issued, the required interest rate rose to 13%. What would be the bonds value? What would be the value of the bonds three years after issue in each scenario above, assuming that interest rates stayed steady at either 7% or 13%?

Twin Oaks Center has a bond issue outstanding with a coupon rate of 7% and 4 years remaining until maturity. The par value of the bond is $1,000, and the bond pays interest annually.
a) what is the current value of the bond if present market conditions justify a 14% required rate of return?
b)If Twin oaks' four year bond had semiannual coupon payments. What would be it current value?
c) Assume that it had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Assuming a 7% semiannual required rate of return).

Minneapolis health system has bonds outstanding that have four years remaining to maturity, a coupon interest rate of 9% paid annually and a $1,000 par value.
a) What is the yield to maturity on the issue if the current market price is $829
b) If the current market price is $1104
c) Would you be willing to buy one of these bonds for $829 if you required a 12% rate of return on the issue?

Six years ago, Bradford Hospital issued 20 year municipal bonds with a 7% annual coupon rate. The bonds were called today for a $70 call premium- that is, bondholders received $1070 for each bond. What is the realized rate of return for those investors who bought the bonds for $1,000 when they were issued.

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Solution Summary

There are 4 problems. Solutions to these problems depict the methodology to estimate the current value and YTM in the given cases. Solutions are derived with the help of functions in MS Excel.

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Please refer attached file for better clarity of formulas.

Assume Venture Healthcare sold bonds that have a 10-year maturity, a 12% coupon rate with annual payments, and a $1,000 par value. Suppose that two years after the bonds were issued, the required interest rate fell to 7%. What would be the bonds value? Suppose that two years after the bonds were issued, the required interest rate rose to 13%. What would be the bonds value?

Coupon amount=PMT=1000*12%=$120
Number of coupon payments left=NPER=8
Required interest rate=RATE=7%
Maturity amount=FV= $1,000
Bond value can be found by using PV function in MS Excel.
Bond Value=($1,298.56) PV(E7,E6,E5,E8)

Coupon amount=PMT=1000*12%=$120
Number of coupon payments left=NPER=8
Required interest rate=RATE=13%
Maturity amount=FV= $1,000
Bond value can be found by using PV function in MS Excel.
Bond Value=($952.01) =PV(E14,E13,E12,E15)

What would be the value of the bonds three years after issue in each scenario above, assuming that interest rates stayed steady at either 7% or 13%?
Coupon amount=PMT=1000*12%=$120
Number of coupon payments left=NPER=7
Required interest rate=RATE=7%
Maturity amount=FV= $1,000
Bond value can be found by using PV function in ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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