Bond value and changing required returns Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in 15 years. The bond has a coupon interest rate of 13% and pays interest annually. a. Find the bond value if the required return is (1) 13%, (2) 17%, and (3) 10%. b. Use your finding in part a and the graph here, , to discuss the relationship between the coupon rate, the required return and the market value of the bond relative to its par value. c. What two possible reasons could cause the required return to differ from the coupon interest rate?

Bond value and changing required returns Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in 15 years. The bond has a coupon interest rate of 13% and pays interest annually. a. Find the bond value if the required return is (1) 13%, (2) 17%, and (3) 10%. b. Use your finding in part a and the graph here, , to discuss the relationship between the coupon rate, the required return and the market value of the bond relative to its par value. c. What two possible reasons could cause the required return to differ from the coupon interest rate?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

What is the expected capital gains yield for each bond in each year? Round your answers to two decimal places. See attached format Bond A has a 9% annual coupon, matures in 12 years, and has a $1,000 face value. Bond B has a 10% annual coupon, matures in 12 years, and has a $1,000 face value. Bond C has an 8% annual coupon, matures in 12 years, and has a $1,000 face value. Each bond has a yield to maturity of 9%.
Conceptual Overview: Explore the value of fixed-interest coupon bonds of different terms. This graph shows the value of 10% coupon bonds of different terms across differing market interest rates. Each bond pays INT = $100 at the end of each year and returns M = $1,000 at maturity. For comparison, the blue line depicts the value of a one-year bond. The term of the other bond in years may be changed using the slider. Drag on the graph to change the current market interest rate (rd) at which the bond (orange curve) is evaluated. ∑ t = 1 Y r s I N T ( 1 + r d ) + M ( 1 + r d ) = ∑ t = 1 1 5 $ 1 0 0 ( 1 + 0 . 1 0 0 ) + $ 1 0 0 0 ( 1 + 0 . 1 0 0 ) = 1 , 0 0 0 ∑ t=1 Yrs (1+r d ) t INT + (1+r d ) Yrs M =∑ t=1 15 (1+0.100) t $100 + (1+0.100) 15 $1000 =1,000 ∑t=1Yrs(1+rd)tINT+(1+rd)YrsM=∑t=115(1+0.000)t$100+(1+0.000)15$1000=2,500. 1. What is the value of a 15-year 10% $1,000 coupon bond when the market interest rate is 15%? $421$708$1,000$1,5192. What is the value of a 12-year 10% $1,000…
Exploring Finance: Coupon Bonds. Coupon Bonds Conceptual Overview: Explore the value of fixed-interest coupon bonds of different terms. This graph shows the value of 10% coupon bonds of different terms across differing market interest rates. Each bond pays INT = $100 at the end of each year and returns M = $1,000 at maturity. For comparison, the blue line depicts the value of a one-year bond. The term of the other bond in years may be changed using the slider. Drag on the graph to change the current market interest rate (rd) at which the bond (orange curve) is evaluated. 5. For a 10%, $1,000 coupon bond, a longer term bond (say, 15 years) is: less affected by changes in the market rate than a 1-year bond. affected the same by changes in the market rate than a 1-year bond. more affected by changes in the market rate than a 1-year bond. Cannot be determined.
Duration and price sensitivity a) Calculate the duration and modified duration of a bond with a face of $1,000, a 6% coupon rate, and a 5% YTM with 1 payment per year and a maturity of 10 years, using the Excel DURATION and MDURATION formulas. b) Calculate the following: 1. What are the approximate percentage and dollar changes in price for a 1% change in interest rates using the duration approximation formula? 2. What are the actual percentage and dollar changes in price if interest rates increase by 1%?
Please use this information to help me determine the correct Realized rate of return
Answer with Excel functions and steps
2. Finding the Yield to Maturity (I/Y) of bonds in the secondary market. Plug in the values in the formula, write the keys you enter in the Financial Calculator, and use Excel (formula and arguments). Use the Table below for each answer. a. A bond is currently traded at $850 in the secondary market. It matures in 7 years and has a coupon rate of 3%, paid semi-annually. Find the YTM (I/Y in the calculator) i. Is this a discount or premium bond? ii. Is YTM more or less than the Coupon Rate? iii. How are your previous two answers related? Explain. b. A bond is currently traded at $1350 in the secondary market. It matures in 7 years and has a coupon rate of 9%, paid semi-annually. (I/Y in the calculator) i. Is this a discount or premium bond? ii. Is YTM more or less than the Coupon Rate? iii. How are your previous two answers related? Explain. c. Describe the relationship between the YTM, the coupon rate, and the bond price.
What are the excel formulas and answers to Part A and Part B. Part A: (Left Side) KIMCHI CORPORATION's capital investment bonds have a maturity of 10 years with a face value of $1,000 and a semi-annual 10% coupon. They are callable in 3 years at $1150 and currently sell for $1,290. What is the nominal yield to maturity and the nominal yield to call? What return should investors expect to earn on these bonds. Part B: (Right Side) KIMCHI CORPORATION also has bonds with 5 years left to maturity with an annual coupon of 10%. What would be the yield to maturity at a current market price of $850? What would be the yield to maturity if the current market price would be $1,125? What would be the price of the bond to you if your cost of capital was 12%? What would be the price of the bond to you if your cost of capital was 8%?
The Chief Financial Officer of a company would like to raise money for new equipment by floating a new bond issue. The CFO would like to receive $1000 (full face value) for each of the bonds she sells. After collecting the below bond market data, and if the bonds carry a rating of A and have a term of 10 years, what coupon rate should be included in the bond contract? Assume an annual coupon payment. Security& Rating Maturity Face Coupon Price Treasury 1 $ 1,000 0.00% $ 965.00 Treasury 3 $ 1,000 1.90% $ 939.06 Treasury 5 $ 1,000 4.30% $ 932.42 Treasury 10 $ 1,000 6.80% $ 1,007.12 Treasury 15 $ 1,000 6.60% $ 908.25 CorpA A 5 $ 1,000 8.10% $ 990.00 CorpB BB 10 $ 1,000 7.90% $ 859.88 CorpC AA 15 $ 1,000 7.00% $ 660.00

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS