1) 7 years ago, a company issued a 25-year bond at par value of 1000$. The market rate at the time was 6%, and is now

Question

1) 7 years ago, a company issued a 25-year bond at par value of 1000$. The market rate at the time was 6%, and is now 7%. The bond yields semi-annual coupons. What is the price of the bond today? 2) Big House Nursery Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ______? 3) Malek will save $1,000 a year at the beginning of every year starting in 2 years' time. His investment will earn 5%, compounded monthly. What will his investment be worth in 10 years' time?

Help In Homework · Accepted Answer

1) 7 years ago, the bond's selling price is equal to par value so, the coupon rate is equal to market rate (6%). We can calculate the current bond price by using the following formula in excel:- =-pv(rate,nper,pmt,fv) Here, PV = Current bond price Rate = 7%/2 = 3.5% (semiannual) Nper = (25-7)*2 = 36 periods (semiannual) Pmt = Coupon payment = $1,000*6%/2 = $30 FV = $1,000 Substituting the values in formula: = -pv(3.5%,36,30,1000) = $898.55 2) We can calculate the current price of bond by using the following formula in excel:- =-pv(rate,nper,pmt,fv) Here, PV = Current price of bond Rate = 10% Nper = 20 periods Pmt = Coupon payment = $1,000*8% = $80 FV = $1,000 Substituting the values in formula: = -pv(10%,20,80,1000) = $829.73 3) We can calculate the future value by using the following formula in excel:- =fv(rate,nper,-pmt,pv,type) Here, FV = Future value Rate = 5.12% Nper = 10-2 = 8 periods Pmt = $1,000 PV = $0 Substituting the values in formula: = fv(5.12%,8,-1000,0,1) = $10,079.47 Working note: EAR = (1+Rate/n)^n-1 = (1+5%/12)^12-1 = 1.0512 - 1 = 5.12%

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1) 7 years ago, a company issued a 25-year bond at par value of 1000$

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