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Unformatted text preview: Chapter 5 51 The rate of return is (1000/300) 1/10 or 12.79% 52 Value of 15year corporate bond; 9% coupon rate; 8 % market interest rate Assuming coupons are paid semiannually, Value of Bond = 45*(11.0430 )/.04+1,000/1.04 30 = $1,086.46 If market interest rates increase to 10%, Value of Bond = 45*(11.0530 )/.05+1,000/1.05 30 = $923.14 The bonds will trade at par only if the market interest rate = coupon rate. Alternatively, you could consider the compounding effect in the market interest rate – the sixmonth interest rate will be less than 4%. In that case, the value of the bonds would be as follows: Sixmonth rate = (1.08) 1/2 = .0392 Value of Bond = 45*(11.039230 )/.0392+1,000/1.08 15 = $1,101 53 If the NV Technologies bond is trading at par, its yield is equal to its coupon rate of 8%. If GEV Technologies has the same rating, it should have a similar yield. Hence, we can write: n n 04 . 1 100 ) 04 . 1 1 1 ( 04 . 75 . 3 95 + = , where n/2 is the maturity in years of the GEV bond. Solving, we find n = 41; hence the maturity is 20.5 years....
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This note was uploaded on 12/28/2009 for the course FEWEB CORPFIN taught by Professor Dorsman during the Spring '09 term at Vrije Universiteit Amsterdam.
 Spring '09
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