5a FYI bonds have a par value of $1,000. The bonds pay an 8% annual coupon and will mature in 11 years. i) Calculate the price if the yield to maturity on the bonds is 7%, 8% and 9%, respectively. ii) What is the current yield on these bonds if the YTM on the bonds is 7%, 8% and 9%, respectively. Hint, you can only calculate current yield after you have determined the intrinsic value (price) of the bonds. iii) Explain the impact on price if the required rate of return increases Bonds paying an 8% coupon have payments of $80 per year. The future value = the par value, which is returned at bond maturity. N is the years (number of coupon payments) to maturity. 56 Let's look at the 8% coupon bond again. Assume that the required rate of return is now 9% and that rate stays constant until the bond matures. What is the price when there are 10 years to maturity, then at 5 years to maturity and then 1 year to maturity. 6 LRO Inc. bonds on July 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on July 1, 2025. What is the intrinsic value of an LRQ Corporation bond on July 1, 2012 to an investor with a required return of 7%? Hints: The bonds pay interest (coupon payments) every six months. The coupon rate is 5.5%, or $55 per year. Half of this amount is paid every 6 months. Original years to maturity 2025-2006 = 19 years. But we are now at 2012, and there are 13 years to maturity remaining. However, N is the number of payments (of $55/2) and that would be 13 * 2. As with all TVM problems, N, I/Y and PMT must be on the basis. We need the required rate per 6 month period = 7%/2 = 3.5% per 6 months. 7 Bart's Moving Company bonds have a 11% coupon rate. Interest is paid annually. The bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of Bart's Moving Company bonds if investors' required rate of return is 9.5%. 8 Rework the above problem assuming semi-annual coupon payments