Finance 501

Bond Valuation

Part I

Answer these questions and show your work:

• Assume that the company ( Kraft Inc) that you selected for the Module 1 SLP has a bond outstanding that matures in 20 years and has a coupon rate of 6.5%. The par value of the bond is $1,000.
• If the yield to maturity is 8% and the bond pays interest on an annual basis, whats the current price of the bond? Is the bond selling for a premium or discount? How can you tell?
• If the yield to maturity is 8% but the bond pays interest on a semi-annual basis instead of an annual basis, whats the current price of the bond? Is it different from the value when using annual compounding? Explain.
• Now, assume that the economy enters into a recession and interest rates fall. The bonds yield to maturity is now 5%. Whats the bonds new price? How does the price compare with your answer in part a? Why did the bonds value change?
• Abondmaturesintenyearsandiscurrentlysellingfor$1,125.Thebondpayinterestannually,hasaparvalueof$1,000,andayieldtomaturityof10.75%.Whatsthebondscurrentyield?

Show work in excel format