| | | | | 12/6/17 6:34 |
| Bonds Valuation and Cost of Capital |
| Bond Price |
| a) Assume that UPC is issuing a 10-year, $10,000 par value bond with a 6% annual coupon if its required rate of return is 6%? What is the value of this bond? |
| N | 10 | | Years to Maturity |
| CPN % | 6% | | Coupon Rate |
| YTM | 6% | | Yield-To-Maturity |
| Par Value | $10,000 |
| PRICE | ??? |
| Discount or Premium |
| b) If the coupon rate changes to 7%, would UPC be issuing a discount or a premium bond? |
| N | 10 |
| CPN % | 7% |
| YTM | 6% |
| Par Value | $10,000 |
| | | | A premium bond is one in which its present value or price is higher than its face or par value. A discount bond is one in which its present value or price is lower than its face or par value. |
| PRICE | ??? |
| c) If the coupon rate changes to 5%, would UPC be issuing a discount or a premium bond? |
| N | 10 |
| CPN % | 5% |
| YTM | 6% |
| Par Value | $10,000 | | A premium bond is one in which its present value or price is higher than its face or par value. A discount bond is one in which its present value or price is lower than its face or par value. |
| PRICE | ??? |
| d) Values of the 5%, 6%, and 7% coupon bonds over time if the required return remained at 6%. Complete the table for years 1-8. |
| | | | 6% coupon bond |
| | Maturity | 5% coupon bond | | 7% coupon bond |
| | 0 | $9,263.99 | $10,000 | $10,736.01 |
| | 1 |
| | 2 |
| | 3 |
| | 4 |
| | 5 |
| | 6 |
| | 7 |
| | 8 |
| | 9 |
| | 10 | $10,000.00 | $10,000 | $10,000.00 |
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