4) coupon: 100,000* 0.07 = 7,000
PV of the coupons, use PV ordinary annuity "PVoa"
PVoa = PMT[(1 - (1 / (1 + r)^n )) / r]
= 7,000[(1 - (1 / 1.06^3)) / 0.06]
= 7,000[(1 - 0.83962) / 0.06]
= 7,000[2.67301]
= $18,711.08365
add PV of par...
PV of par: 100,000 / 1.06^3 = 83,961,9283
PV of coupons + PV of par = $102,673.01 rounded
note that the bond sells at a premium b/c market rate is < coupon rate
5) after one year, two years remain, n = 2, r = 0.05, re-work as above..
PVoa = 7,000[(1 - (1 / 1.05^2)) / 0.05]
= 7000[1.85941]
= 13,015.87301
PV par: 100,000 / 1.05^2 = 90,702.94785
add the two together: $103,718.82 rounded
your return: [(sale price + coupon received) / purchase price] - 1
= [(103718.82 + 7000) / 102673.01] - 1
= 0.07836, or 7.836%
Confused on these two problems from my assignment. Any help would be greatly appreciated!
4. A corporate bond has a Par Value of $100,000, a coupon rate of 7 percent, and 3 years to maturity. If these coupons are paid annually, what is the price of bond if the market is demanding a 6 percent rate of return on the investment?
5. Suppose you bought the bond descibed in thbe previous question. If you sold the bond after you collected the first coupon payment at the end of one year when its yield-to-maturity had fallen to 5 percent, what would the bond sell for? What would your actual realized one-year rate of return be on this investment?
