Question: just the equations needed to answer the problem Please answer the following questions. You have to show your work to get full credit. 1. Bond
Please answer the following questions. You have to show your work to get full credit. 1. Bond Valuation (20 Points). An investor wants to buy a corporate bond that pays interest annually (annual compounding) and has a maturity of 5 years. The bond has a coupon rate of 4%, an annual yield-to-maturity of 3% and a face value of $1000. In addition, the bond is callable and pays a call premium of $350. Given the above information, answer the following: (a) 5 Points. Write down the mathematical expression that would determine the price of this bond. (Note: You don't have to solve for the price, but all variables in the expression must be filled in.) (b) 5 Points. Now suppose that the investor anticipates that interest rates will drop to 2% 3 years from today. Based on this expectation, how much would this investor be willing to pay for this bond today? (Note: As in a) simply plug in for all variables in the formula that would determine the price, but you don't have to solve for it.) (c) 5 Points. If the price of this bond is $1045.80 and the bond is called back after 1 year, write down the expression that would determine the investor's yield-to-call on this bond. (d) 5 Points. What would be the expected return to this investor if he sold the bond after 4 years for a price of $1045
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