correct ans a5 b 353364 c 0 d 8 e 785831 f 636 g 164 An unc

correct ans:

a)5% , b) 3,533.64, c) 0%, d) 8%, e) 7,858.31, f) 6.36%, g) 1.64%

An unconventional bond offers no coupon for 10 years. After that, the bond will pay a $500 coupon payment each year for 13 years. The bond matures in 23 years and has face value of $10,000. The YTM is 8%. What is the coupon rate during the years for which a coupon payment is made? 50% What is the bond value today? $7,628.87 What is current yield this year? 8% What is capital gains yield this year? 0% What is bond value in 12 years? $7,628.87 What is current yield in 12 years? 6.36% What is capital gains yield in 12 years? 1.64%

Solution

a) The Bond is giving coupon of $500 and it face value is $10,000.

So Coupon rate will be = $500/$10,000*100= 5%.

b) The Present value of the coupon+ present value of face value of bond will be bond value today.

1st we will find the value bond in 10th year= pmt*((1-(1/(1+r)^n))/r)+Face value/(1+r)^n

= 500* ((1-(1/(1+0.08)^13))/0.08) +10,000/(1.08^13)

=$7,628.87

Now, the value today will be = $7628.87/(1.08^10) =$3,533.64

C) Current yeild this year will be 0% as no coupon has been paid.

D) Captial Gain yeild = YTM- Current yeild =8-0= 8%

e) Bond Value in 12th year will be

The Present value of the coupon+ present value of face value of bond will be bond value in 12th year.

1st we will find the value bond in 12th year= pmt*((1-(1/(1+r)^n))/r)+Face value/(1+r)^n

= 500* ((1-(1/(1+0.08)^11))/0.08) +10,000/(1.08^11)

=$7,858.31

f) Current yeild in 12th year = coupon paid in 12th year/bond value in 12th year = $500/$7858.31*100 =6.36%

g)Captial Gain yeild = YTM- Current yeild =8-6.36= 1.64%