Challenge Problem A $1 000 face value bond issued by the Dysane Company currently pays total annual

QUESTION

Challenge Problem A $1,000 face value bond issued by the Dysane Company currently pays total annual interest of $79 per year and has a thirteen-year life.

What is the present value, or worth, of this bond if investors are currently willing to accept a 10 percent annual rate of return on bonds of similar quality if the bond is a Eurobond?
How would your answer in (a) change if the bond is a U.S. bond?
How would your answer in (b) change if, one year from now, investors only required a 6.5 percent annual rate of return on bond investments similar in quality to the Dysane bond?
Suppose the original bond can be purchased for $925. What is the bond”s yield to maturity?
Soluition Face Value = $1000 Coupon Payment (annually) = 79 Coupon payment (semi annually) = $79/2 = $39.50 Rate = 10% , semin annually = 5% Time = 13 years, semi annually = 26 a) As a Eurobond, coupon interest is paid on annual basis, Price = 79*PVIFA(10%, 13) +1000*PVIF(10%,13) == (79*7.103) + 1000*(.290) =$851.14 b) If bond is a US bond, then coupon payment will be changed to semi annually Rate = 5%, Time = 26 Price = 39.50*PVIFA(5%,26) +1000*PVIF(5%,26) == (39.50*14.3752) + 1000*(.2812) =$849.06 c) If

odic rate is 6.5%, and investment is made after 1 year Periodic rate = 6.5%/2 = 3.25%, Time = 12*2 = 24 Price = 39.50*PVIFA(3.25%,24) +1000*PVIF(3.25%,24) == (39.50*17.3732) + 1000*(.4354) =$1121.61 d) Yield to Maturity, if price of bond is $925 = (Coupon Payment +(FV-MV)/Time to Maturity)/(FV+MV)/2 =(79+((1000-925)/13))/(1000+925)/2 = 8.90%

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