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28 Nov 2019

Develop a valuation model for the long-term corporate bond with a face value at maturity of $100,000, a maturity of 10 years, a coupon interest rate of 6%, and a market yield of 8%. The coupons are assumed to be paid semi-annually. In your development and presentation, include a time line showing the relevant cash flows along with all of the steps that allow you to generate the value (price of the bond). Please make sure that the equations are readable. With excel it does not pull up in the answer so cannot read it well!

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Sixta Kovacek
Sixta KovacekLv2
21 May 2019
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Related questions

Consider a bond with a face value F a maturity of T years and a coupon rate p%, coupons paid semi annually, with price P.

a) Define the yield to maturity of the bond

b) What does it mean that the bond sells "at parity" (or "at par")

c) Explain why the bond sells at parity when the coupon rate equals the yield to maturity

(DO NOT USE EXCEL) Ford is about to issue a new corporate bond, face value= $1,000, coupon rate= 8% (annual), term to the maturity= 4 years. You know that a very similar bond issued by GM is already being traded in a bond market with its market price of $1,020, face value= $1,000, coupon rate= 6% (annual) and term to the maturity= 4 years. What would be the appropriate value of Ford's new corporate bond? (Assume that coupons are paid annual for Ford and GM bonds) (DO NOT USE EXCEL)

Note: If not otherwise stated, assume that:

• Yield-to-maturity (YTM) is an APR, semi-annuallycompounded

• Bonds have a face value of $1,000

• Coupon bonds make semi-annual coupon payments; however, couponrates (rc) are annual rates, i.e., bonds make a semi-annual couponpayment of rc/2

You must invest $100,000, and the bonds listed below from Ato E are the only investments available today (assume that it ispossible to buy a fraction of a bond in order to invest the full$100,000). The same 6% market interest rate (APR, compoundedsemi-annually) applies to all of these bonds and they have thefollowing additional characteristics:

A. 6 years to maturity and 4% coupon rate (coupons paidannually)

B. 3 years to maturity and 7% coupon rate (coupons paidsemi-annually)

C. 6 years to maturity and 0% coupon rate (discount orzero-coupon bond)

D. 3 years to maturity and 4% coupon rate (coupons paidsemi-annually)

E. 6 years to maturity and 4% coupon rate (coupons paidsemi-annually)


a) Rank these bonds according to their interest ratesensitivities, from the most interest rate sensitive to the leastinterest rate sensitive.

Select one:

ABCDE

CAEDB

CEABD

DBAEC

BDEAC

AECDB

EACBD

CDEAB

b) If you want to benefit from an unexpected decrease inmarket interest rates, which bond would you purchase?

Select one:

A

B

C

D

E

c) If you want to minimize interest rate risk, whichbond would you purchase?

Select one:

A

B

C

D

E

d) What is the duration (in years) of the bond you chosein part c)?

Select one:

0.32 years

2.76 years

2.84 years

5.68 years

5.52 years

2.34 years

1.98 years

3.96 years

NOTE: Please show all the work, without using excel (step bystep with equations) Thanks!

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