Consider a bond that has a par value of 20 points $1,000, pays $50 at the...

 

Transcribed Image Text:

Consider a bond that has a par value of 20 points $1,000, pays $50 at the end of each year in coupon payments, and has four (4) years remaining until maturity. Assume that, according to the market, the prevailing annualized yield in other bonds with similar characteristics is calculated based on: real interest rate = 2.5%, inflation prime = 3%, default prime = 2%, maturity prime = 0.5%, liquidity prime = 1%, and exchange rate prime 0% because the cash payments are denominated in U.S. dollars. Requirements (answer in the same order requested and indicate each question's number): 1)Calculate the coupon rate (show the formula, do the math, and indicate the unit of measurement) 2) Calculate the discount rate (show the formula, do the math, and indicate the unit of measurement) 3) Calculate the appropriate price for the bond (show the formula, do the math, and indicate the unit of measurement) 4) Express the bond's Present Value in percentage terms of the face value (show the formula, do the math, and indicate the unit of measurement) 5)Is the bond trading at par value, discount, or premium? Explain. Consider a bond that has a par value of 20 points $1,000, pays $50 at the end of each year in coupon payments, and has four (4) years remaining until maturity. Assume that, according to the market, the prevailing annualized yield in other bonds with similar characteristics is calculated based on: real interest rate = 2.5%, inflation prime = 3%, default prime = 2%, maturity prime = 0.5%, liquidity prime = 1%, and exchange rate prime 0% because the cash payments are denominated in U.S. dollars. Requirements (answer in the same order requested and indicate each question's number): 1)Calculate the coupon rate (show the formula, do the math, and indicate the unit of measurement) 2) Calculate the discount rate (show the formula, do the math, and indicate the unit of measurement) 3) Calculate the appropriate price for the bond (show the formula, do the math, and indicate the unit of measurement) 4) Express the bond's Present Value in percentage terms of the face value (show the formula, do the math, and indicate the unit of measurement) 5)Is the bond trading at par value, discount, or premium? Explain.

Answer rating: 100% (QA)

Bond Calculations 1 Coupon Rate Formula Coupon rate Annual coupon payment Par value 100 Calculation Coupon rate 50 1000 100 5 2 Discount Rate This que... View the full answer