#2 Solutions - Bond Valuation

#2 Solutions - Bond Valuation - UNIVERSITY OF NORTH...

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U NIVERSITY OF N ORTH C AROLINA A T C HAPEL H ILL K ENAN -F LAGLER B USINESS S CHOOL B USI 408: C ORPORATE F INANCE S OLUTIONS TO P RACTICE P ROBLEM SET #2: B OND V ALUATION P ROF . A RZU O ZOGUZ 1. Consider a bond, which pays $80 in annual coupon, and has a face value of $1,000. Calculate the yield to maturity if the bond has a. 20 years remaining to maturity, and it is sold at $1,200. Note that for both of these problems it is not possible to solve for the yield to maturity algebraically. You can get an approximate answer by trial and error, or you can use Excel’s RATE function, or a financial calculator. An approximate answer would be sufficient. Since the bond is selling at a premium, its yield should be less than the coupon rate of 8%. () () () () % 22 . 6 1 1000 1 1 1 80 1 1 1 1 1200 20 20 0 = + + + × = + + + × = = r r r r r F r r C B T T T b. 10 years remaining to maturity, and it is sold at $950. Since the bond sells at a discount, its yield should be greater than the coupon rate. () () % 77 . 8 1 1000 1 1 1 80 950 10 10 0 = + + + × = = r r r r B 2. You have just purchased a newly issued $1,000 five-year Vanguard Company bond at par. This five year bond pays $60 in interest semiannually. You are also considering the purchase of another Vanguard Company bond that pays $30 in semiannual interest payments and has six years remaining before maturity. This bond has a face value of $1000. a. What is the yield on the five-year bond (expressed as an effective annual yield)? If the bond is selling at par, this means that the coupon rate is equal to the yield to maturity. Since the bond makes coupon payments of $60, the coupon rate is 60/1000 = 6% Thus, the yield to maturity on the five-year bond is 6%.
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The effective annual rate would be % 09 . 6 1 2 06 . 1
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This document was uploaded on 11/04/2011 for the course BUSI 408 at UNC.

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#2 Solutions - Bond Valuation - UNIVERSITY OF NORTH...

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