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Easy Problem Chapter 9

This document contains the solutions to 4 problems regarding bond valuation: 1) For a bond with a coupon rate of 8%, yield to maturity of 9%, and par value of $1,000, the current market price is $935.82. 2) For a bond with a coupon rate of 7%, par value of $1,000, original price of $985, the yield to maturity is 7.216% and the price 3 years later is $988.45 if the YTM remains constant. 3) For a bond with a par value of $1,000, coupon rate of 9% semiannually, maturity of 8 years, and YTM of 8.5%,

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117 views4 pages

Easy Problem Chapter 9

This document contains the solutions to 4 problems regarding bond valuation: 1) For a bond with a coupon rate of 8%, yield to maturity of 9%, and par value of $1,000, the current market price is $935.82. 2) For a bond with a coupon rate of 7%, par value of $1,000, original price of $985, the yield to maturity is 7.216% and the price 3 years later is $988.45 if the YTM remains constant. 3) For a bond with a par value of $1,000, coupon rate of 9% semiannually, maturity of 8 years, and YTM of 8.5%,

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Natally Langfeldt
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Easy Problem Chapter 9

Untuk memenuhi tugas individu mata kuliah Accounting and Finance

Dosen

Sri Handaru Yuliati, Dra., M.B.A

Disusun oleh

Aliza Safira Salsabilla Purwanto

21/476049/NEK/25481

MAGISTER MANAJEMEN

FAKULTAS EKONOMIKA DAN BISNIS

UNIVERSITAS GADJAH MADA

YOGYAKARTA

2021
1. Asiana Fashion’s bonds have 10 years remaining maturity. Interest is paid annualy;
they have a $1,000 par value; the coupon interest rate is 8%; and the yield maturity is
9%. What is the bond’s current market price?
Answer:
Using excel calculation with the input of:
N = 10
I/YR = 9%
PMT = 80
FV = 1,000
Formula: =PV(Rate;Nper;PMT;FV)
The bond’s current market price is $935.82

2. A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and
sells at $985.
a. Yield to Maturity?
Using excel calculation with the input of:
N = 10
PMT = 70
PV = -985
FV = 1,000
Formula: =RATE(Nper;PMT;PV;FV)
The bond’s yield to maturity is 7.216%
b. The bond’s price 3 years later when the YTM remains constant
Using excel calculation with the input of:
N=7
I/YR = 7.216%
PMT = 70
FV = 1,000
Formula: =PV(Rate;Nper;PMT;FV)
The bond’s price 3 years later is $988.45
3. Kyoto Corporation’s outstanding bonds have a $1,000 par value, a 9% semiannual
coupon, 8 years to maturity, and a 8.5% YTM. What’s the bond price?
Answer:
Using excel calculation with the input of:
N = 16
I/YR = 4.25%
PMT = 45
FV = 1,000
Formula: =PV(Rate;Nper;PMT;FV)
The bond’s price is $1,028.60

4. A firm’s bonds have a maturity of 10 years with a $1,000 face value, have an 8%
semiannual coupon, are callable in 5 years at $1,050, and currently sell at a price of
$1,100. What are their nominal yield to maturity and their nominal yield to call?
What return should investors expect to earn on these bonds?
a. YTM
Using excel calculation with the input of:
N = 20
PMT = 40
PV = -1,100
FV = 1,000
Formula: =RATE(Nper;PMT;PV;FV)
YTM of the bond is 6.62%
b. YTC
Using excel calculation with the input of:
N = 10
PMT = 40
PV = -1,100
FV = 1,050
Formula: =RATE(Nper;PMT;PV;FV)
YTC of the bond is 6.48%
c. The investors should expect the return on YTC to earn on this bond since the bond
sells at a premium so interest rates have declined since the bond was originally
issued and the issuer would most likely call the bond and issue bonds at the lower
6.62% interest rate.

Common questions

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The YTM of the bond is 6.62% calculated using =RATE(Nper;PMT;PV;FV) with N = 20, PMT = 40, PV = -1,100, FV = 1,000 .

Investors should expect the return on YTC because when bonds are sold at a premium, it indicates that interest rates have declined since issuance. In such cases, the issuer is more likely to call the bond before maturity to reissue at a lower rate, making the yield to call more relevant for estimating returns .

The bond price of Kyoto Corporation is $1,028.60 calculated using =PV(Rate;Nper;PMT;FV) with N = 16, I/YR = 4.25%, PMT = 45, FV = 1,000 for a semiannual coupon bond .

The bond’s price three years later will be $988.45 if the yield to maturity remains constant, calculated using the present value function =PV(Rate;Nper;PMT;FV) with inputs: N = 7, I/YR = 7.216%, PMT = 70, FV = 1,000 .

To calculate the yield to maturity, use the formula =RATE(Nper;PMT;PV;FV) with inputs: N = 10, PMT = 70, PV = -985, FV = 1,000. The yield to maturity is 7.216% .

The YTC for callable bonds is calculated using =RATE(Nper;PMT;PV;FV) with appropriately adjusted inputs for call scenarios. For example, with a semiannual coupon and callable in 5 years at $1,050, YTC is 6.48%. It is relevant because if bonds sell at a premium, investors should expect the issuer to call the bond when interest rates decline .

The bond’s current market price is $935.82 calculated using the present value function PV(Rate;Nper;PMT;FV) with inputs: N = 10, I/YR = 9%, PMT = 80, FV = 1,000 .

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