Explore BrainMass

Explore BrainMass

    Bonds: price, current yield

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

    The Walter company issued a 25 year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at 10% annual rate.

    a. What is the bond's price today if the interest rate on comparable new issues is 12%?
    b. What is the price today if the interest rate is 8%?
    C. What is the price today if the interest rate is 10%?
    D. Calculate the current yields for part a, b, and d.
    E explain the results of parts a & b interm of oppoturnies avialable to investors.

    © BrainMass Inc. brainmass.com June 3, 2020, 9:08 pm ad1c9bdddf
    https://brainmass.com/business/interest-rates/bonds-price-current-yield-167259

    Solution Preview

    The Walter company issued a 25 year bond 5 years ago with a face value of $1,000.  The bond pays interest semiannually at 10% annual rate.

    Number of years to maturity= 20 =25-5

    To calculate the price of the bond we need to calculate / read from tables the values of
    PVIF= Present Value Interest Factor
    PVIFA= Present Value Interest Factor for an Annuity
    Price of bond= PVIF * Redemption value + PVIFA * interest payment per period

    PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
    PVIF( n, r%)= =1/(1+r%)^n

    a. What is the bond's price today if the interest rate on comparable new issues is 12%?

    Price of bond
    Coupon rate= 10.000%
    Face value= $1,000
    Interest payment per year= $100.00 =10.% x 1000

    Frequency= S Semi Annual

    No of years to maturity= 20
    No of Periods=n= 40 =2x20

    Discount rate annually= 12.00%
    Discount rate per period=r= 6.00% =12.%/2 Semi ...

    Solution Summary

    The expert calculates the price and current yield of bonds. Comparable new issue interest rates for bond prices are determined.

    $2.19

    ADVERTISEMENT