Corp Finance?

Question

Is this true:
Values of outstanding bonds change whenever the going rate of interest changes.

If you buy a callable bond and interest rates decline, will value of your bond rise by as much as it would have risen if the bond had not been callable?

A bond has 10 years remianing to mature. Intrerest is paid annually they have a $1000 par value; coupon intrerest rate is 8% and the yeild to maturity is 9%. What is the bond's current market price?

An 8% semiannual coupon bond matures in 5 years. The bond has a face value of $1000 and yield of 8.21%. What are the bond's price and YTM?

Answer 1

1. Yes -- a company's bonds change value whenever the yield changes. Bond prices go up when yields go down, and they go down when yields go up.

2. The value of a callable bond will not rise as much when rates go down as they would if the option were not there. This is because the decline in interest rates increases the chance that the company will pay off the bond early -- so those high coupons will disappear.

3. The cash flow for this bonsd is $80 per year for nine years and $1080 in the tenth year. You need to divide each of these cash flows by (1.09)^N -- where N is the number of years to the flow. Then add them up. The answer is: $935.82

4. I don't understand why you are asked for the YTM -- they give it to you as 8.21%. Perhaps they want you to state it annually. This bond pays $40 every six months for 4.5 years. After 5 years, you get back $1040. You need to divide each cash flow by (1+y/2)^N -- where y is the yield (8.21%) and N is the number of half years. This gives a price of $991.53. I would say that the yield is 8.21%. But perhaps they want the APR? The APR (annual percentage rate) is ](1+y/2)^2-1] This turns out to be 8.379%

Answer 2

Is this your homework?