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In January 2017, Microsoft Corporation issued $17 billion of bonds in seven parts, with maturities ranging from

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In January 2017, Microsoft Corporation issued $17 billion of bonds in seven parts, with maturities ranging from 2020 to 2057. The bond issue was rated Aaa by Moody's. Two of the bond offerings are described below.

Amount: $4 billion; Maturity: February 6, 2027; Coupon: 3.3%; Price: 99.31; Yield: 3.383%.

Amount: $2 billion; Maturity: February 6, 2057; Coupon: 4.5%; Price: 99.49; Yield: 4.528%.

a. Discuss the relation between the coupon rate, issuance price, and yield for the 2027 issue.

b. Compare the yields on the two bond issues. Why are the yields different when the bond ratings are the same?

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a Microsoft is offering bonds with a coupon stated rate of 33 when t...View the full answer


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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.

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