Question
Bond Valuation (20 Points). An investor wants to buy a corporate bond that pays interest annually (annual compounding) and has a maturity of 5 years.
Bond Valuation (20 Points). An investor wants to buy a corporate bond that pays interest annually (annual compounding) and has a maturity of 5 years. The bond has a coupon rate of 4%, an annual yield-to-maturity of 3% and a face value of $1000. In addition, the bond is callable and pays a call premium of $350. Given the above information, answer the following:
(a) 5 Points. Write down the mathematical expression that would determine the price of this bond. (Note: You dont have to solve for the price, but all variables in the expression must be filled in.)
(b) 5 Points. Now suppose that the investor anticipates that interest rates will drop to 2% 3 years from today. Based on this expectation, how much would this investor be willing to pay for this bond today? (Note: As in a) simply plug in for all variables in the formula that would determine the price, but you dont have to solve for it.)
(c) 5 Points. If the price of this bond is $1045.80 and the bond is called back after 1 year, write down the expression that would determine the investors yield-to-call on this bond.
(d) 5 Points. What would be the expected return to this investor if he sold the bond after 4 years for a price of $1045?
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