Determining the ytm-bond pricing

Reference no: EM13973047

1. YTM

A company has 7 percent coupon bonds on the market with 9 years left to maturity. Coupons are paid annually. If the bond currently sells for $1,038.50, what is its yield to maturity? What if the current price is only $980.30?

2. Bond Pricing

A company issued 20-year bonds one year ago at a coupon rate of 6.1%. Coupons are semi-annually paid. If YTM on these bonds is 5.3%, what is the current bond value?

What if the coupon is paid annually?

Hint: Use PV function.

3. Nominal vs Real Returns

A. An investment offers a total return of 14% over the coming year. You believe the real return on this investment will be only 10%. What do you believe the inflation rate will be over the next year?

B. If inflation rate in the next year is 3% and if you want the real return of 8%, what is the nominal return that you require from an investment?

Hint: Fisher Effect Equation.

4. Interest Rate Risk

Both Bonds A and B are priced at par since their YTMs are the same as their coupon rate of 7%. What happens to their prices if interest rate in the market rises by 2%? What if the interest rate falls by 2%? Compute the prices in $ and also the percentage change.

Bond A:		Bond B:
Coupon rate	7%	Coupon rate	7%
Settlement date	1/1/2000	Settlement date	1/1/2000
Maturity date	1/1/2003	Maturity date	1/1/2020
Redemption (% of par)	100	Redemption (% of par)	100
# of coupons per year	2	# of coupons per year	2

YTM	7%

5. Zero Coupon Bonds

Your company needs to raise $30 million by issuing 20-year bonds. Assume YTM is 7.5% and you are evaluating two alternatives: A. 7.5% semiannual coupon bond, or B. a zero coupon bond.

Amount needed	$30,000,000
Years to maturity	20
Required return = Coupon rate	7.5%
Face value	$1,000
Tax rate	35%

(1) How many of coupon bonds would you need to issue to raise the whole amount? How many of zeroes would you need to issue?

(2) At maturity, what will your company's repayment be if you issue the coupon bond? What if you issue the zeroes?

6. Holding Period Return

You buy a 7% annual coupon bond for $875 today. The bond has 10 years till maturity.

A. What rate of return do you 'expect' to earn on your bond investment?

B. Two years from now, the YTM on your bond has declined by 1% due to credit rating improvement or market interest rate changes. If you decide to sell the bond, what price will your bond sell for? What is the holding period return on your investment? Compare this HPR with the YTM from part A.

Reference no: EM13973047

Questions Cloud

Identify the goals of the business : Provide a reliable analysis of needs, which must include both business and stakeholder requirements for use of the website .

What type of chemical reaction occurs when salt dissolves : During the epidemic in London in 1854, John Snow gathered facts about the distribution of households with cholera cases before he developed his hypothesis that the disease could be traced to the water coming from a single well on Broad Street. Sno..

Legal and ethical issues including scope of liability : It is to be word-processed; 12pt font, single line spacing, and fully referenced (APA). All pages are to have Headers and/or Footers with your Name and Student ID number and Page Number.

Analyze current state of insider threats to computer systems : Analyze the current state of insider threats to computer systems and infrastructure in terms of numbers, costs and potential problems. What are the various profiles of insiders who may compromise your systems?

Determining the ytm-bond pricing : A company has 7 percent coupon bonds on the market with 9 years left to maturity. Coupons are paid annually. If the bond currently sells for $1,038.50, what is its yield to maturity? What if the current price is only $980.30?

Describe specific experimentation and observational methods : Describe specific experimentation and observational methods that could be used within your discipline to gather data. Include your rationale. Evaluate their effectiveness with respect to certain areas within your discipline

How do policies communicate corporate culture : How do policies communicate corporate culture? Define the security term "integrity". Provide two examples of a business situation in which the loss of integrity could result in significant harm.

Describe how this event affects the way we live : Give a brief background on the organism ( name( common and scientific), gram reaction, mechanisms of disease.), disease, or mechanism of concept under discussion. describe how this event affects the way we live. did it correct a problem? create on..

What is the work requirement for the compressor : what is the exit temperature (ºC) if the gas is treated as an ideal gas at all times? what is the exit temperature (ºC) if the gas is not considered ideal at all times?

User Account

All Pages