problem set 3 solutions

problem set 3 solutions - What was its issuing price? b....

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Problem Set #3 Bond Valuation 1. A major auto manufacturer has experienced a market re-evaluation lately due to a number of lawsuits. The firm has a bond issue outstanding with 15 years to maturity and an annual coupon rate of 8% (paid semiannually). The required annual rate has now risen to 14%. Given that the bond's face value is $1,000, at what price can these securities be purchased in the market? Solution: 30 periods Semiannual discount rate is 7% Semiannual coupon payment is $40 2. A corporate issued a 10 years coupon bond with coupon rate of 8%. The coupon would be paid semiannually. a. When the bond was underwritten (i.e., when it was issued), it was priced with a yield of 8.02%.
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Unformatted text preview: What was its issuing price? b. Now 6 months has passed and the interest rate environment has changed. Suppose now the yield on the bond has dropped to 6.50%. What is the current price of the bond, assuming that the first coupon has just been paid? Solution: (a) 6 . 998 $ 5 . 455 1 . 543 0401 . 1 1000 ) 0401 . 1 1 1 ( 0401 . 40 0401 . 1 1000 0401 . 1 40 20 20 20 20 1 = + = + = + = = t t P (b) 1 . 1105 $ 6 . 544 5 . 560 0325 . 1 1000 ) 0325 . 1 1 1 ( 0325 . 40 0325 . 1 1000 0325 . 1 40 19 19 19 19 1 = + = + = + = = t t P ( ) ( ) ( ) ( ) 76 . 627 $ 1314 . 000 , 1 $ 4090 . 12 40 $ 000 , 1 $ 40 $ 30 , 07 . 30 , 07 . = + = + = PVF PVFA D...
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