Question

Daniel Jackson just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Blossom Corp. that pays an annual coupon rate of 4.0 percent. If the current market rate is 9.50 percent, what is the maximum amount Daniel should be willing to pay for this bond? (Round answer to 2 decimal places, e.g. 15.25.)

Cullumber Real Estate Company management is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the price of these bonds if the appropriate discount rate is 12.8 percent? (Round answer to 2 decimal places, e.g. 15.25.)

Susan Wilson wants to invest in four-year bonds that are currently priced at $868.90. These bonds have a coupon rate of 6.1 percent and make semiannual coupon payments. What is the current market yield on this bond? (Round intermediate calculations to 5 decimal places, e.g. 1.25145 and final answer to 2 decimal places, e.g. 15.25%.)

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

$1,000.00 4.00% 1 Face value of Bond Annual coupon rate Maturity in years market yield rate 9.50% Price of Bond-blossom Corp $788.82 1000 101 2 Face value of Zero Bond Matuity in years Compounding in a year Discount rate 11 12 13 12.80% Price of Zero Bond-Cullumber $289.18 16 $1,000.00 6.10% 18 19 20 3 Face value of Bond Annual coupon rate Coupon period in a year Maturity in years Current price $868.90 Market yield 10.17% 27

Cell reference -

B 1 2 1000 0.04 1 Face value of Bond Annual coupon rate Maturity in years market yield rate 0.095 Price of Bond-blossom Corp =PV(C5,C4,-C3*C2,-C2,0) 1000 10.128 =C9/(1+C12/C11)^(C10*С11) 9 2 Face value of Zero Bond 10 Matuity in years 11 Compounding in a year 12 Discount rate 13 14 Price of Zero Bond-Cullumber 15 16 17 3 Face value of Bond 18 Annual coupon rate 19 Coupon period in a year 20 Maturity in years Current price 1000 0.061 4 868.9 Market yield = 2*RATE(C20*С19,-C18/C19*C17,C21,-C17,0) 24 25 26

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.