IBM has a bond issue outstanding with 14 years to maturity. When originally issued the bond had a par value of $1,000, a stated coupon rate of 12% and 15 years to maturity. Currently, similar risk bonds in the market place are yielding 8%. What would you expect IBMâs bond to sell for today? Additionally, at such a price is the bond selling at a discount or a premium? Why?

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6 Jul 2019

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Bond Valuation Problem:

Taylor Company has a bond issue of $1000 par value bonds with a 8% annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield 10% rate of return.

1.Will the Taylor Company bonds sell for a premium or a discount?

2.Calculate the current value (what an investor will pay today) of each Taylor Company bond.

Consider the two bonds described below:

Bond A

Maturity(years) 15

Coupon rate(%)10

(paid semiannually)

Par Value 1,000

Bond B

Maturity(years) 20

Coupon (%) 6

(paid semiannually)

Par value 1,000

a.If both bonds had a required of 8%,what would the bond's price be?

b.Describe what it means if a bond sells at a discount,at a premium,at its face value (par value).Are these two bonds selling at a discount,premium,or par?

c.If the required return on the two bonds rose to 10%,what would the bond's prices be?

Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 8 percent, has a YTM of 6 percent, and has 14 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6 percent, has a YTM of 8 percent, and also has 14 years to maturity. The bonds have a $1,000 par value. What is the price of each bond today? If interest rates remain unchanged, what do you expect the price of these bonds to be one year from now?

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