Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
Looking at cashflows arising from a bond, one can see that a bond is essentially a bundle of cashflows arising on different future dates. 6
Looking at cashflows arising from a bond, one can see that a bond is essentially a bundle of cashflows arising on different future dates. 6 There are several semiannual cashflows arising from coupon payments and another cashflow at maturity equal to the bond's face value. This means that if one calculates the present values of those cashflows with an appropriate discount rate and aggregates them, the result should be the fair value, or price of the bond. Under the most basic approach, the discount rate is the yield investors expect for similar bonds. One needs to calculate the price of bonds (the amount paid for $100 face value in the case of US bonds), because bonds can change hands between its issue and maturity. Meanwhile, there are opportunities to calculate yields from prices 7, because Q8: Looking at bonds as a bundle of cashflows (UL6), a bond issued on August 15, 2020 and maturing on August 15, 2025, will usually have (a) coupon payments and one payment for the face value. In that case, and if the coupon is 5 percent, a holder of $10,000 in face value will receive coupon payments of $ (b) on (c) and August 15 of each year. When people expect a yield of 5.1% at the time of issue for an equivalent bond, the present value of cashflow at maturity is worth $ (d) (round to two decimal places). Calculating the present value of other cashflows and aggregating them enables one to arrive at the fair issue price of $ (e) (result from Excel "PRICE" function, rounded to two decimal places)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started