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BONDS Task

This document contains a summary of bonds prepared by Kelly Milagros Orozco Rosales for the course Corporate Finance at Ricardo Palma University. It addresses seven questions related to bond pricing, yields, and the relationship between nominal interest rates, real interest rates, and expected inflation. The questions cover topics such as calculating the price of zero coupon bonds at different yields to maturity, pricing bonds trading at a premium or discount, and using the Fisher effect to determine expected inflation and nominal interest rates.

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Kelly Milagros Orozco Rosales
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37 views

BONDS Task

This document contains a summary of bonds prepared by Kelly Milagros Orozco Rosales for the course Corporate Finance at Ricardo Palma University. It addresses seven questions related to bond pricing, yields, and the relationship between nominal interest rates, real interest rates, and expected inflation. The questions cover topics such as calculating the price of zero coupon bonds at different yields to maturity, pricing bonds trading at a premium or discount, and using the Fisher effect to determine expected inflation and nominal interest rates.

Uploaded by

Kelly Milagros Orozco Rosales
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Ricardo Palma University

Faculty: Economic and Business Science

School: Global Business Administration

Professor: Carlos, González Taranco

Curso: Corporate Finance

Group: 1

BONDS

Author

Kelly Milagros, Orozco Rosales

June 12, 2020 – Lima, Perú

2020-I

1. What is the price of a 20-year, zero coupon bond paying $1,000 at


maturity if the YTM is:
a. 5 percent?

Current price = Face value/(1+YTM)^(Time period)


= 1000/(1+0.05)^(20)
= 376.89

b. 10 percent?

= 1000/(1+0.10)^(20)
= 148.64

c. 15 percent?

= 1000/(1+0.15)^(20)
= 61.1

2. Microhard has issued a bond with the following characteristics:


Par: $1,000
Time to maturity: 20 years
Coupon rate: 8 percent
Semiannual payments

Par=$1,000
Time to Maturity: 20 years
Coupon Rate:8%

BOND YTM= Semi Annual YTM x2


= (Semi Annual coupon + ((Face Value - Price)/Number of periods to maturity))/((Face value
+ Price)/2)x2
Semiannual Payments= 1000 x 8% x 1/2= 40
Face value= 1000
Calculate the price of this bond if the YTM is:
a. 7 percent
Number of periods to maturity= 20 x 2=40
Semmi Anual interest rate= AIR/2
= 7%/2= 3.5%
Semiannual Payments= 1000 x 8% x 1/2= 40
PV= (3.5%;40;-40;-1000)
PV=$1,106.78

b. 9 percent

Number of periods to maturity= 20 x 2=40


Semmi Anual interest rate= AIR/2
= 9%/2= 4.5%
Semiannual Payments= 1000 x 8% x 1/2= 40
PV= (4.5%;40;-40;-1000)
PV=$907.99

c. 5 percent

Number of periods to maturity= 20 x 2=40


Semmi Anual interest rate= AIR/2
= 9%/2= 4.5%
Semiannual Payments= 1000 x 8% x 1/2= 40
PV= (2.5%;40;-40;-1000)
PV=$1,376.54

3. Watters Umbrella Corp. issued 15-year bonds 2 years ago at a coupon rate of 6.4
percent. The bonds make semiannual payments. If these bonds currently sell for 105
percent of par value, what is the YTM?

P=C/r(1-1/(1+r)^T)+F/(1+r)^T

P= 32/r(1-1/(1+r)^26)+1000/(1+r)^26

r=2.92%

YTM=rx2= 2.92%x2=5.85%

4. A Japanese company has a bond outstanding that sells for 92 percent of its
¥100,000 par value. The bond has a coupon rate of 2.8 percent paid annually and
matures in 21 years. What is the yield to maturity of this bond?

Bond sells: 92000

coupon rato= 2.8% annually ---> 2800

time= 21 years

frequency in the year= 1

No. periods= 21

par= 100000

YTM= x

2800(1+YTM)^-1 + 2800(1+YTM)^-2 +...+2800(1+YTM)^-21 + 100000 (1+YTM)^-21 = 92000

YTM= 3.336% / current yield = 3.043%

5. If Treasury bills are currently paying 4.5 percent and the inflation rate is 2.1 percent,
what is the approximate real rate of interest? The exact real rate?
The approximate relationship between nominal interest rates (R), real interest rates
(r), and inflation (h), is: R= r+ h

Approximate r= 0.045 – 0.021

Approximate r= 0.024 or 2.4%

The Fisher equation, which shows the exact relationship between nominal interest
rates, real interest rates, and inflation, is:

(1 + R) = (1 + r)(1 + h)

(1 + 0.045) = (1 + r)(1 + 0.021)

Exact r = [(1 + 0.045) / (1 + 0.021)] – 1

Exact r = 0.0235

r = 0.024

6. Suppose the real rate is 2.4 percent and the inflation rate is 3.1 percent. What rate
would you expect to see on a Treasury bill?

The approximate relationship between nominal interest rates (R), real interest rates
(r), and inflation (h), is: R= r+ h

Approximate r= 0.024 – 0.031

Approximate r= -0.007

The Fisher equation, which shows the exact relationship between nominal interest
rates, real interest rates, and inflation, is:

(1 + R) = (1 + r)(1 + h)

(1 + 0.024) = (1 + r)(1 + 0.031)

Exact r = [(1 + 0.024) / (1 + 0.031)] – 1

Exact r = - 0.0067895247332687
r= - 0.007

7. An investment offers a 14 percent total return over the coming year. Alan Wingspan
thinks the total real return on this investment will be only 10 percent. What
does Alan believe the inflation rate will be over the next year?

(1+R)=(1+r)(1+h)

h=((1+0.14)/(1+0.10))-1=3.64%

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