FINA 395 Chapter Notes - Chapter 6: Financial Instrument, Preferred Stock, Ticker Tape

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25 Jan 2015

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Chapter 6: how to value bonds and stocks. 6. 1 the price of a pure discount (zero coupon) bond is the present value of the par. Remember, even though there are no coupon payments, the periods are semiannual to stay consistent with coupon bond payments. So, the price of the bond for each ytm is: pv = ,000/(1+0. 05/2)20 = . 27, pv = ,000/(1+0. 10/2)20 = . 89, pv = ,000/(1+0. 15/2)20 = . 41. 6. 2 the price of any bond is the pv of the interest payment, plus the pv of the par value. The price of the bond at each ytm will be: pv = ({1 [1/(1+0. 035)]50 }/0. 035) + ,000[1/(1+0. 035)50] When the ytm and the coupon rate are equal, the bond will sell at par: pv = ({1 [1/(1+0. 045)]50 }/0. 045) + ,000[1/(1+0. 045)50] When the ytm is greater than the coupon rate, the bond will sell at a discount: pv = ({1 [1/(1+0. 025)]50 }/0. 025) + ,000[1/(1+0. 025)50]

Related Questions

EJ Corp bond carries a 9 percent coupon, paid semi-annually. The par value is $1,000, and the bond matures in 12 years. If the bond currently sells for $905.50 (PV), what is its yield to maturity?

Enter PV as a negative number. Calculate equal 24 payments ($1,000*.09/2) and enter.

Remember the last payment is the return of principal plus PMT. Use IRR(cash flows).

Time	Payment Periods	Cash Flow
Today	0	Pv>= ?
	1	?
	2	?
	3	?
	4	?
	5	?
	6	?
	7	?
	8	?
	9	?
	10	?
	11	?
	12	?
	13	?
	14	?
	15	?
	16	?
	17	?
	18	?
	19	?
	20	?
	21	?
	22	?
	23	?
Add FV to PMT=	24	?

IRR=> ?

The YTM is 2*IRR===> ?

You want to make a 5-year investment on bonds, and if you buy bonds with longer period of maturity, they will be sold at the prevailing market price at the end of the fifth year. All coupons will be reinvested. You forecast that the rates are going to change after you purchase the bonds. Now you have three bonds with same initial YTM to consider: A. 5-year maturity, 6% coupon paid annually, YTM=9% B. 10-year maturity, 8% coupon paid annually, YTM=9% C. 15-year maturity, 4% coupon paid annually, YTM=9% To pick the best one, you want to calculate the following:

1) What are the current prices of three bonds based on the initial YTM given? [2 points]Current prices of all bonds are shown below Bond 1: n=5; PMT = 6; YTM = 9%; FV = 100; PV=calculate = 88.33 It can be calculated by putting the values in the financial calculator OR by using the PV formule in excel which is =PV(9%,5,6,100) Bond 2 n=10; PMT = 8; YTM = 9%; FV = 100; PV=calculate = 93.58 Bond 3 n=15; PMT = 4; YTM = 9%; FV = 100; PV=calculate = 59.7

2) If the coupon payments are reinvested at the prevailing market rate (7% for the coming 5 years), what are the future values (at the end of the fifth year) of all five coupon payments for three bonds respectively? [3 points]

3) What are the selling prices of three bonds at the end of the fifth year, given that the prevailing market rate is 8% at that time? (For bond A, use its par value as the final selling price, as it will mature in 5 years). [2 points]

4) What are the HPRs for the three bonds? [2 points] 5) Whatâs your recommendation? [1 point]

yellowcaribou187

Please answer questions 7 to 11 with work, thank you!

7) Cohen has issued a bond with the following characteristics: Par: $1,000; Time to maturity: 15 years; Coupon rate: 7%; Semiannual payment. What is the price of the bond if the YTM is 9%?

8) The Pane bond has 11.5 years to maturity, a YTM of 7.6%, and a current price of $1,060. The bond makes semiannual payments. What is the coupon rate on this bond?

9) What is the inflation rate if nominal return is 14% and real return is 10%?

10) Jay, Inc. and Nic Corp. both have 7% coupon bonds outstanding with semiannual payments and both are priced at par value. The Jay, Inc. bond has 2 years to maturity, while the Nic Corp. bond has 15 years to maturity. If interest rate suddenly rises from 7% to 9%, what is the percentage change in the price of these bonds? If interest rate suddenly decreases by 2%, what is the percentage change in the price of these bonds?

11. You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8%, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

orchidfrog938

FINA 395 Chapter Notes - Chapter 6: Financial Instrument, Preferred Stock, Ticker Tape

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