15.1 bonds solutions[1]

# 15.1 bonds solutions[1] - 0011 0010 1010 1101 0001 0100...

This preview shows pages 1–4. Sign up to view the full content.

4/12/2010 1 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 15.1 Bonds 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 Bonds 2 Parties involved BORROWER – corporation LENDER – investor Purchaser receives Interest in the form of periodic interest payments Principal returned at maturity 2 Interest rates BOND rate – rate payable on the face value of the bond YIELD rate – prevailing rate of return in the bond market

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
4/12/2010 2 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 \$1,000 bond at j 2 = 10% for sale market rate: j 2 =10% Purchase price equal to \$1,000 market rate: j 2 =20% Purchase price less than \$1,000 market rate: j 2 =5% Purchase price more than \$1,000 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 2 Interest Rates BOND RATE Let b = periodic coupon rate b is used ONLY to calculate the bond payment Bond payment = Face Value (FV) x periodic coupon rate PMT = FV x b MARKET RATE Let I/Y = market rate (or yield rate) used to calculate purchase price of the bond Purchase Price = P.V. of interest payments + P.V. of Face Value **discounted at market rate**
4/12/2010 3 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 \$1,000 bond at j 2 = 10% is redeemable in 6 years. a) Find the purchase price to yield j 2 = 10%. P.V. of Bond Payments b = .10/2 = .05 PMT = 1,000 x .05 = 50 N = 2 x 6 = 12 I/Y = 10 P/Y = 2 C/Y = 2 FV = 0 CPT PV = -443.16 PP = 443.16 + 556.84 = \$1,000 P.V. of Face Value FV = 1,000 PMT = 0 I/Y = 10 P/Y = 2 C/Y = 2 N = 12 CPT PV = -556.84 4 2 5 1 0011 0010 1010 1101 0001 0100 1011

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 9

15.1 bonds solutions[1] - 0011 0010 1010 1101 0001 0100...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online