Question 10 2 A 25-year corporate bond has a par value of $5,000 and a 7%...
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Question 10 2 A 25-year corporate bond has a par value of $5,000 and a 7% annual coupon rate. Assume that your required rate of return is 9.5% and that you plan to hold onto this bond for 19 years. You and the market have expectations that in 19 years the yield-to-maturity for this bond (or another bond with similar risk and maturity) will be 14%. How much are you willing to pay for this bond today? This is a two-step problem. You will need to know how much you can sell the bond for at the end of 19 years. Then you must use this value to determine how much you would be willing to pay for it today! So, Step 1 is to find the value of the bond in 19 years -> N=6,... Step 1 What is the value of the bond in 19 years? Step 2 Basically, you are considering buying the bond today with the expectation of selling it in 19 years. And, you want to earn 9.5% APR on this investment/transaction. So, if you can figure out how much you should be able to sell it for in 19 years (Step 1 answer), then you can figure out how much to pay for it today to make sure you get your 9.5%. How much are you willing to pay for the bond today, i.e. what is the value of the bond today? (Please report 2 decimal places) Hint for Step 2: Normally, we set the FV to be par value because we assume the bondholder keeps the bond until it matures. And, when a bond mature, the bondholder receives the par value. But, in this problem, the bondholder is NOT going to hold the bund until it matures. The bondholder is going to sell the bond before maturity. So, the bondholder will NOT receive the par value. But, what amount WILL the bondholder receive when they sell the bond? THAT amount is the FV for Step 2. NOTES: 1. Please provide your calculator inputs and output for each Step (1 and 2) as follows: N =, I/Y = (as %), PV =, PMT, FV... Remember, your CY and PY calculator values should be set to 1. 2. Please enter ALL numbers as POSITIVE numbers even though you would need to enter a number(s) as negative in your calculator! 3. Please enter the I/Y as a percentage with 2 decimal places - just like on calculator, i.e. 10.25 for 10.25%. Step 1 N = I/Y = (as percent, e.g. 10.25 for 10.25%) PV = % PMT = FV = Step 2 N = I/Y= (as percent, e.g. 10.25 for 10.25%) PV = PMT = FV = $ S S S % Question 10 2 A 25-year corporate bond has a par value of $5,000 and a 7% annual coupon rate. Assume that your required rate of return is 9.5% and that you plan to hold onto this bond for 19 years. You and the market have expectations that in 19 years the yield-to-maturity for this bond (or another bond with similar risk and maturity) will be 14%. How much are you willing to pay for this bond today? This is a two-step problem. You will need to know how much you can sell the bond for at the end of 19 years. Then you must use this value to determine how much you would be willing to pay for it today! So, Step 1 is to find the value of the bond in 19 years -> N=6,... Step 1 What is the value of the bond in 19 years? Step 2 Basically, you are considering buying the bond today with the expectation of selling it in 19 years. And, you want to earn 9.5% APR on this investment/transaction. So, if you can figure out how much you should be able to sell it for in 19 years (Step 1 answer), then you can figure out how much to pay for it today to make sure you get your 9.5%. How much are you willing to pay for the bond today, i.e. what is the value of the bond today? (Please report 2 decimal places) Hint for Step 2: Normally, we set the FV to be par value because we assume the bondholder keeps the bond until it matures. And, when a bond mature, the bondholder receives the par value. But, in this problem, the bondholder is NOT going to hold the bund until it matures. The bondholder is going to sell the bond before maturity. So, the bondholder will NOT receive the par value. But, what amount WILL the bondholder receive when they sell the bond? THAT amount is the FV for Step 2. NOTES: 1. Please provide your calculator inputs and output for each Step (1 and 2) as follows: N =, I/Y = (as %), PV =, PMT, FV... Remember, your CY and PY calculator values should be set to 1. 2. Please enter ALL numbers as POSITIVE numbers even though you would need to enter a number(s) as negative in your calculator! 3. Please enter the I/Y as a percentage with 2 decimal places - just like on calculator, i.e. 10.25 for 10.25%. Step 1 N = I/Y = (as percent, e.g. 10.25 for 10.25%) PV = % PMT = FV = Step 2 N = I/Y= (as percent, e.g. 10.25 for 10.25%) PV = PMT = FV = $ S S S %
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