Business Management Assignment.

ASSIGNMENT 2

Question 1

Suppose a ten-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of$1034.74.

1. What is the bond's yield to maturity (expressed as an APR with semiannual compounding)?

Semiannual coupons payment: (1,000*8%)/2 = 40

Time period = 10 years and APR with semiannual compounding => 20 time periods

1,034.74 = +  + ….  => YTM = 3.75%*2 = 7.5%[pic 1][pic 2][pic 3]

Using Excel:

= RATE (NPER, PMT, PV, FV)

=RATE (20,40,-1034.74,1000)

1. If the bond's yield to maturity changes to 9% APR, what will the bond's price be?

YTM = 9%

NPER = 20

PMT = 40

FV = 1,000

Bonds price: PV =  + + …+  =  $934.96[pic 4][pic 5][pic 6]

Using Excel:

= PV (YTM, NPER, PMT, FV)

= PV (0.09/2, 20, 40, 1,000) = $934.96

Question 2

You are trying to compare the present values of two separate streams of cash flows which have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent and the inflation is 2%. What rate should you use to discount the real cash flows?

The nominal interest rate does not consider inflation into account.

Real interest rate = nominal interest rate – inflation rate => does take inflation into account

Therefore, I would use the comparable real rate to discount the real cash flows by comparing the 2 cash flows, in which situation the real cash flows need to be discounted by the difference of nominal interest rate and inflation rate.

Question 3

A 16-year, 4.5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

At YTM = 5.5%

Price = 45 * [ = 895.38[pic 7]

At YTM = 5.7%

Price = 45* [ = 876.19[pic 8]

Percentage change in price:

 = -2.14%[pic 9]

So, the price will decrease by 2.14% if YTM increases from 5.5% to 5.7%

Question 4

Soo Lee Imports issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent. The bonds make semiannual payments. These bonds currently sell for 102 percent of par value. What is the yield-to-maturity? (You can use the shortcut formula from cheat sheet)

YTM (semiannual) = =  = 5.16%[pic 10][pic 11]

• Annual: YTM = 5.16*2 = 10.32%

Question 5

Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield-to-maturity of 9.2 percent, and a current price of $802.30. The bonds make semiannual payments. What is the coupon rate?