# Bond Valuation

HWBond Valuation and Bond Yields

Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds:

•Bond A has a 7% annual coupon, matures in 12 years, and has a $1000 face value. •Bond B has a 9% annual coupon, matures in 12 years, and has a $1000 face value. •Bond C has an 11% annual coupon, matures in 12 years, and has a $1000 face value.

Each bond has a yield to maturity (YTM) of 9%.

1)Without calculation, indicate whether each bond is trading at a premium, discount, or at par. In order to indicate whether each bond is trading at a premium, discount, or at par, you need to compare the yield to maturity (YTM). If the YTM is greater than the bond coupon rate, then the bond is considered to be trading at a premium. If the YTM is lesser than the bond coupon rate, then the bond is considered to be trading at a discount, and if the YTM is equal to the bond coupon rate, then the bond is considered to be trading at par. Bond A: YTM = 9%, 9% > the coupon rate of 7%, therefore the bond is traded at a discount. Bond B: YTM = 9%, 9% = the coupon rate of 9%, therefore the bond is traded at par. Bond C: YTM = 9%, 9% < the coupon rate of 11%, therefore the bond is traded at a premium. 2)Calculate the value of each bond.

You can use the financial calculator in order to calculate the value of each bond. The value of each bond is equal to the present value (PV). So the first step is to assign the other values into the calculator. Since all the bonds are annual, (N) will be the number of years. The (I/Y) will equal to the YTM. The (PMT) will equal to the face value times the coupon rate. The (FV) will equal to the face value. After finding all the values, simply use the (CPT) (PV) to find the value of each bond. Bond ABond BBond C

N = 12PV = -856.79N = 12PV = -1000.00N = 12PV = -1143.21 I/Y = 9%I/Y = 9%I/Y = 9%

PMT = 70 (1000*7%)PMT = 90...

Please join StudyMode to read the full document