1.Lifehouse Software has 8.4 percent coupon bonds on the market with 1

QUESTION

1.Lifehouse Software has 8.4 percent coupon bonds on the market with 10 years to maturity. The bonds make semiannual payments an currently sell for 104 percent of par. What is the current yield on Lifehouses bonds?The yield to maturity?the effective annual yield? 2.BDJ Co. wants to issue new 30 years bonds for some much needed expansion project. The company currently has 8 percent coupon bond on the market that sell for $1,095, make semiannual payments. and mature in 15 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?
Solution: 1) Par value = $1000 Years to maturity = 10 years or 20 semi-annual periods. Current Market Value = 1.04 * 1000 = $1040 Coupon = 0.084 * 1000 = $84 annually or $42 semi-annually. Current Yield = Coupon / Market Price = 84/1040 = 8% Yield to maturity = r 1040 = 42 / (1+r)^1 + 42 / (1+r)^2 + . 1000 + 42 /(1+r)^20 YTM (r) = 3.9 % semi-annually or 7.8% annually. Effective annual yield = (1+semi-annual yield) ^ 2 1 = (1.039)^2 1 = 7.95% 2) For Existing bonds: Number of years = 15 years or 30 semi-annual periods Coupon = $80 annually or $40 semi-annually

Market price = $1095 YTM = r 1095 = $40/ (1+r)^1 + $40/(1+r)^2 + 1000+40/(1+r)^30 YTM (r) = 3.48% semi-annually or 6.96% annually. For New issue: Number of years = 60 semi-annual periods Coupon =? YTM = 3.48% semiannually Market Value = Par Value = $1000 1000 = C / (1.0348)^1 + C / (1.0348)^2 + .1000+C / (1.0348)^60 Coupon (C) = 34.8 semi-annually or 69.6 annually

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