unit 5 quiz review 1. the acme company's bonds mature in 10 years have a par value of $1,000...
TRANSCRIPT
UNIT 5 QUIZ REVIEWUNIT 5 QUIZ REVIEW
• 1. The ACME Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $50. The market interest rate for the bonds is 10%. What is the price of these bonds?
USE PV FUNCTION IN EXCELUSE PV FUNCTION IN EXCEL
PAR 1000 EXAMPLEMKTRATE 10%COUPON 5% $50YEARS 10PV ($692.77)FV 1000
PV#2 PROBLEMPV#2 PROBLEM
• ACE Ventures' recently issued bonds that mature in 20 years. They have a par value of $1,000 and an annual coupon of 5%. If the current market interest rate is 7%, at what price should the bonds sell?
PV#2 PROBLEMPV#2 PROBLEM
MKTRATE 7%COUPON 5% $50YEARS 20PV ($788.12)FV 1000TYPE 0
RATE#3 PROBLEMRATE#3 PROBLEM
• UBS Incorporated issued BBB bonds two years ago that provided a yield to maturity of 12%.
• Long-term risk-free government bonds were yielding 9% at that time.
• The current risk premium on BBB bonds versus government bonds is half of what it was two years ago.
• If the risk-free long-term government bonds are currently yielding 8%,
• then at what rate should Rollincoast expect to issue new bonds?
Risk PremiumRisk Premium
• Risk Premium=Corporate yield minus the LT Risk free Government bonds
• If Corp yield is 10% and LT Govt. rate is 5% then Risk premium is 5%
• So corporate bonds will sell at the current LT rate of bonds plus the risk premium.
• YTM= Risk Premium • + Current long term rate on Bonds.• New Yield to maturity
Risk PremiumRisk PremiumRisk Premium=Corporate yield 12%
• MINUS LT Risk free Govt bonds 9%
• Risk premium was 3%
• Now LT Risk free Govt bonds 8%
• Risk premium is half of last year 1.5%
• So it should be issued rate of 9.5%
#4Yield to maturity#4Yield to maturity
• A 10-year, $1,000 face value bond has an 8.5% annual coupon. The bond has a current yield of 8%. What is the bond’s yield to maturity?
• Step 1: Calculate the bond's current price from information given in the current yield.
Yield to maturityYield to maturity
• Current yield = Coupon/Price
• 0.08 = $85/Price
• Price = ? = $1,062.50.
• If you use financial calculator by entering the following data as inputs:
• N = 10; PV = -1062.50; PMT = 85; FV = 1000; and then solve for I/YR = 7.5859% or about 7.59%.
YTMYTM
• WHAT RATE OF INTEREST DO YOU EARN IF YOU HELD IT TO MATURUTY?
• PV..PAID $1062.50• TIME 10 YRS• FV $1000• INT PYMNT $85• IN EXCEL- CLICK ON RATE- ENTER
FV 1000PV 1062.5 ENTER AS NEGATIVETIME NPER 10INT PYMNT $85TYPE 0YTMRATE 7.59% FORMAT CELL AS % 2 DECIMAL
PLACES
#5PROBLEM PV#5PROBLEM PV
• You wish to purchase a 20-year, $1,000 face value bond that makes semiannual interest payments of $40. If you require a 10% nominal yield to maturity, what price should you be willing to pay for the bond?
#5PROBLEM PV- COMP #5PROBLEM PV- COMP PERIODSPERIODS
• With semiannual coupon payments, you need to double the number of payments that you will receive over the twenty years. 20*2=40
• You also need to divide the annual interest in half. (YTM) 10%/2=.05
5PROBLEM PV- COMP PERIODS5PROBLEM PV- COMP PERIODS
FV 1000PV ($828.41)TIME NPER 20*2 40INT PYMNT 8% 40TYPE 0YTMRATE 10%/2 0.05
you could use the formula:VB = COUPON [{1 – 1 / (1 + iN}} / i] + FV / (1 + i)N
VB = $40 [{1 – (1 / (1 + .05)^40) }/ .05 ] + $1,000 / (1 + .05)^40
#6 #6 PV OF BONDPV OF BOND
• Rio Corporation issued 15-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the on these bonds has dropped to market interest rate 6%. What is the new price of the bonds, given that they now have 15 years to maturity?
PV OF BONDPV OF BOND
15 TIMEPYMNTINT 70 COUPON 7%
6% MARKET0 TYPE
($1,097.12) PV
#7 YTM#7 YTM
• Brown Enterprises’ bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their yield to maturity
• PV=-1025• FV=1000• INT PYMNT=$80,TYPE=0,TIME=9YRS
#7 YTM-CALC RATE#7 YTM-CALC RATE
• PAID PV OF $1025• GET INT PYMT OF
$80• FV=1000• TERM 9YRS
• YTM IS 7.61%- RATE OF RETURN YOU ARE EARNING
USE RATE FUNCTION1000 FV
9 TIME$80 COUPON
7.61% MARKET YTM0 TYPE
#8 Bo#8 Bond’s Pricend’s Price
• Best Corporation's bonds have a 10-year maturity, a 10% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 14%, based on semiannual compounding.
• What is the bond’s price?
BoBond’s Pricend’s Price
• Par Value $1,000.00Coupon Rate 10.00%Periods/year 2Yrs to Mat 10N=periods 20Annual Rate 14.00%Periodic Rate 7.00%PMT/period $50PV ???????
BoBond’s Pricend’s Price
FV 1000TIME 10 SEMI ANNUAL 20COUPON 10% 100/2 $50MARKET 14% 14%/2 7%TYPE 0 0PV USE PV FUNCTION ($788.12)