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Category: Business and Industry
Date Submitted: 11/10/2015 08:47 AM
Peachtree Securities, Inc.
Bond and Stock Valuation
1. To begin, assume that it is now January 1, 1993, and that each bond in Table 1 matures on December 31 of the year listed. Further, assume that each bond has a $1000 par value; each had a 30 year maturity when it was issued, and the bonds currently have a 10 percent required nominal rate of return.
a. Why do the bonds’ coupon rates vary so widely?
The bond’s coupon rates vary widely because TECO sells bonds at par and sets the coupon rates at the market rate of interest when the bonds are issued. Interest rates have risen over the last quarter century, which explains the rising trend of coupon rates.
c. TECO’s bonds, like virtually all bonds, actually pay interest semi-annually. What is each bond’s value under these conditions? Are the bonds currently selling at a discount or a premium?
5-year bond
FV- $1,000
Pmt/Yr- 2
Pmt- $22.50
Int/yr- 10%
N-10
PV= $787.65 Discount
15-year bond
FV- $1,000
Pmt/Yr- 2
Pmt- $41.25
Int/yr- 10%
N-30
PV= $865.49 Discount
25-year bond
FV- $1,000
Pmt/Yr- 2
Pmt- $63.125
Int/yr- 10%
N-50
PV= $1239.61 Discount
d. What is the effective annual rate of return implied by the values obtained in part c.?
The effective annual rate of return implied is 10.25 percent
2. Now, regardless of your answers to Question 1, assume that the 5 year bond is selling for $800.00, the 15 year bond is selling for $865.49, and the 25 year bond is selling for $1220.00. (Note: Use these prices, and assume semiannual coupons, for the remainder of the questions.)
a. Explain the meaning of the term “yield to maturity”.
Yield to maturity is the rate of return earned on a bond if it is held to maturity and the bond did not default.
b. What is the nominal (as opposed to effective annual) yield to maturity (YTM) on each bond?
5-year bond:
k/2 = 4.817% k = 9.634%
15-year bond:
k/2 = 5.000%...