1 Allied Corporation has just issued ten thousand 1000 bonds

1. Allied Corporation has just issued ten thousand $1,000 bonds, maturing in 2048, to establish a research and development fund for a new product. The goal is to develop and launch this new product by late 2020. The offering interest rate was 4.50% for the bonds.

Identity the following values for each bond:

Face amount

Yield

Coupon payment

Amount paid ______semiannually

Periods to maturity

Present value

Yield to maturity

Solution

Answer

Face amount is $1000

Yield = $1000 (as the bond is issued and reddemed at par )

Coupon payment is $ 1000*4.5% = $45

Amount paid semiannually = 4.5/2 = 2.25% in 6 months = $1000*2.25% = 22.5$

Periods to maturity is 28 years (assumed issued at the end of 2020)

Present value = $1000 per dollar (as the bond issued and redeemed at par so the YTM is equal to the coupon rate therefore )

Yield to maturity = 4.5% ( as it is par value bond , the bond is issued and redeemed at par )