HomeworkLib
Question

Consider the following bond: Face value = 1000; coupon rate = 8%; maturity = 5 years;...

Consider the following bond: Face value = 1000; coupon rate = 8%; maturity = 5 years; ytm = 7%

A) What is the value of the bond today and in 2 years?

b) what are the current yield and capital gains yield for this bond this year and in two years?

c) Assuming interest rates remain the same over this bond's lifetime, what is going to happen to the value of this bond as time goes by?

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

a) Face value = 1000
maturity = 5 years; ytm = 7%
Coupon =8%*1000 =80
Price of bond today =PV of Coupons+PV of Par Value =80*((1-(1+7%)^-5)/7%+1000/(1+7%)^5 =1041.02

Price of bond in 2 years =PV of Coupons+PV of Par Value =80*((1-(1+7%)^-3)/7%+1000/(1+7%)^3 =1026.24

Price of bond in 1 year =PV of Coupons+PV of Par Value =80*((1-(1+7%)^-4)/7%+1000/(1+7%)^4 =1033.87

b)Current Yield =Coupon/Price =80/1041.02=7.68%
Capital Gain Yield =(1033.87-1041.02)/1041.02=-0.68%

Current Yield in 2 years =80/1026.24 =7.80%
Capital gain yield =YTM -Current Yield =7%-7.80% =-0.80%

c) As lifetime increases value of bond decreases.

0 0
Add a comment
Know the answer?
Add Answer to:
Consider the following bond: Face value = 1000; coupon rate = 8%; maturity = 5 years;...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Consider the following bond: Face value = $1000; coupon rate = 8%; yield to maturity =...

    Consider the following bond: Face value = $1000; coupon rate = 8%; yield to maturity = 5%; maturity = 5 years. a. If interest payments are made annually, what is the value of this bond? What are this year's current yield to capital gains yield? b. What is the value of the bond 3 years from now? What are the current yield to capital gains yield to be 3 years from now? c. thank you.

  • Use the bond term's below to answer the question Maturity 8 years Coupon Rate 5% Face...

    Use the bond term's below to answer the question Maturity 8 years Coupon Rate 5% Face value $1,000 Annual Coupons YTM 6% Assuming the YTM remains constant throughout the bond's life, what is the bond's current yield between periods 4 and 5 ? 5.08% 5.18% 5.33% 4.93% You plan on going to law school for 3 years starting in 4 years. The cost of tuition for the first year will be $40,000 The cost of tuition for the second year...

  • Use the bond term's below to answer the question Maturity 12 years Coupon Rate 5% Face...

    Use the bond term's below to answer the question Maturity 12 years Coupon Rate 5% Face value $1,000 Annual Coupons Market Interest Rate 7% Assuming the YTM remains constant throughout the bond's life, what is percentage capital gains/loss between periods 3 and 4 ? A. 1.20% B. 1.29% C. 1.31% D. 1.25%

  • Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If...

    Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the YTM of this bond is 10.2%, then the price of this bond is closest to ________.

  • 1) Consider a 10-year bond trading at $1150 today. The bond has a face value of...

    1) Consider a 10-year bond trading at $1150 today. The bond has a face value of $1,000, and has a coupon rate of 8%. Coupons are paid semiannually, and the next coupon payment is exactly 6 months from now. What is the bond's yield to maturity? 2)A coupon-paying bond is trading below par. How does the bond's YTM compare to its coupon rate? a. Need more info b. YTM = Coupon Rate c. YTM > Coupon Rate d. YTM <...

  • Consider a coupon bond with two years left to maturity. It has a face value of...

    Consider a coupon bond with two years left to maturity. It has a face value of $1000 and a coupon rate of 6%. Assume that all investors believe that the first coupon, to be received one year from today, will be paid but that there is only a 60% probability that the second coupon and the principal will be paid two years from today. There is a 40% chance that the investor will receive only $700 at the end of...

  • Use the bond term's below to answer the question Maturity 7 years Coupon Rate 4% Face...

    Use the bond term's below to answer the question Maturity 7 years Coupon Rate 4% Face value $1,000 Annual Coupons YTM 5% Assuming the YTM remains constant throughout the bond's life, what is the bond's current yield between periods 2 and 3 ? 4.18% 4.10% 4.31% 3.98%

  • Bond Coupon Rate Maturity Year Par Value 1 7.5% 2032 1000 2 8.25% 2029 1000 3...

    Bond Coupon Rate Maturity Year Par Value 1 7.5% 2032 1000 2 8.25% 2029 1000 3 6.0% 2023 1000 a.) Assuming that bonds pay annual coupon, estimate the market value of each bond at a discount rate of 7.4% b.) Assuming that bonds pay annual coupon, what will happen to the price of each bond if market rates suddenly decrease from 7.4% to 6.2%? Which of the three bonds will have the greatest percentage change in price? c.) Assuming that...

  • 19. A bond has 8 years to maturity, a 7 percent coupon, a $1,000 face value,...

    19. A bond has 8 years to maturity, a 7 percent coupon, a $1,000 face value, and pays interest semi-annually. What is the bond's current price if the yield to maturity is 6.97 percent? A. $799.32 B. $848 16 C. $917.92 D. $1,005.46 E. None of the above.l 19. A bond has 8 years to maturity, a 7 percent coupon, a $1,000 face value, and pays interest semi-annually. What is the bond's current price if the yield to maturity is...

  • Consider a bond with the following characteristics today (Year 0): Face Value=$1000 Coupon Rate=5% Interest Rate=9%...

    Consider a bond with the following characteristics today (Year 0): Face Value=$1000 Coupon Rate=5% Interest Rate=9% Time to maturity=10 years What is the current yield in Year 1? (Remember: Starting year is Year 0) Group of answer choices 6.58% 6.73% 6.40% 6.92%

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT