- The issue has 12 years to maturity and a coupon rate of 12 percent, paid annually. The new agreement allows the firm to pay no interest for 5 years. Then, interest payments will be resumed for the next 7 years. Finally, at maturity (Year 12), the principal plus the interest that was not paid during the first 5 years will be paid. However, no interest will accrue or be paid on the deferred interest payments. If the required annual return is 18 percent, what should the bonds sell for in the market today? I am getting two answere… 712.40 and 2nd one is 419.47 for PV. Both are there in the option… I dont know the answere… so which one is right one… 2) You are considering investing in a security that matures in 10 years with a par value of $1,000. During the first five years, the security has an 8 percent coupon with quarterly payments (i.e., you receive $20 a quarter for the first 20 quarters). During the remaining five years the security has a 10 percent coupon with quarterly payments (i.e., you receive $25 a quarter for the second 20 quarters). After 10 years (40 quarters) you receive the par value. Another 10-year bond has an 8 percent semiannual coupon. This bond is selling at its par value, $1,000. This bond has the same risk as the security you are thinking of purchasing. Given this information, what should be the price of the security you are considering purchasing? In this do we use 8% annual interest rate or EAR as 8.16% ? Using 8 % i am getting PV as 1055.02
In qn 1), a) 712.40 b) $337 Qn 2) a) value $410.7 b) value $456.40 I would see that the price is less so the yield is more in case of a) so I consider investing in a). We just discount off the $1000 using 1.025 for 20 and arrive at pv at 5yrs and then discount the pv as fv back to start using 1.02 for 20 pds. Same for b). Let me know if my calc is off.
Hi ov25 In first sum what is b) 337 ? I did get 712.40 is that the answere ? and in 2nd problem… i didnt understand what you gave… I got the PV on security to be considered in investment is 1043.52. The other security is given so that we can use Interest rate from that… which comes to 8.16 EAR.
finance08 Wrote: ------------------------------------------------------- > Hi ov25 > > In first sum what is b) 337 ? I did get 712.40 is > that the answere ? The answer should be $419.47. $712.4 is a distractor. I was wrong as I did not consider the deferred interest payments when I got $337. > > and in 2nd problem… i didnt understand what you > gave… I got the PV on security to be considered > in investment is 1043.52. The other security is > given so that we can use Interest rate from that… > which comes to 8.16 EAR. Just discount the future value all your way into the present. $1000/1.02^20 and so on.