Assignment on

Interest Rates and Bond Valuation

Course Title: Corporate Finance

Course Code: BUS 573

Submitted to

Tasmina Chowdhury Tania

Assistant Professor

Department of Business Administration

Shahjalal University of Science and Technology, Sylhet

Submitted by

Group - 9

Student’s Name Registration No.

Tanvin Hossin Mim 2016731045
Bibak Roy 2016731068
Md. Mofazzal Hossain (Team Leader) 2016731054

Date of Submission

6th January 2022

 Chapter 7
Question-6: Ninja Co. issued 14-year bonds a year ago at a coupon rate of 6.9 percent. The
bonds make semiannual payments. If the YTM on these bonds is 5.2 percent, what is the current
bond price?

Answer-6:
Here given,
i= 6.9%
YTM= 5.2%
n= 14
m= 2
Here Face value of bond is missing. It is not possible to count the current price of the bond
exactly. But due to math solving purpose we can assume Face value $1000; moreover, n=
(14-1)= 13.

Then as per formula-

.069
So, I = 1000× 2

= 34.5

1
⎡ 1− (1+ ).052 13×2 ⎤ 1000
Current Value of Bond= 34. 5 × ⎢ .052
2
⎥+
.052 13×2
⎢ 2
⎥ (1+ )
⎣ ⎦ 2

= 646.13 + 513
= 1159.13

Question-8: Ponzi Corporation has bonds on the market with 14.5 years to maturity, a YTM of
6.1 percent, and a current price of $1,038. The bonds make semiannual payments. What must the
coupon rate be on these bonds?
Answer-8:
Here,
Current Price= $1038
n= 14.5
YTM= 6.1%

We know,
1

𝐶𝑜𝑢𝑝𝑜𝑛 𝑅𝑎𝑡𝑒
⎡ 1− (1+ )𝑌𝑇𝑀 𝑛×𝑚 ⎤ 𝐹𝑉
Current Value of Bond= ⎡𝐹𝑉× ⎤× ⎢ 2
⎥+
⎣ 2 ⎦ ⎢ 𝑌𝑇𝑀
2
⎥ (1+ 𝑌𝑇𝑀 𝑛×𝑚
)
⎣ ⎦ 2

Here Face value of bond is missing. It is not possible to coupon rate of the bond exactly. But due
to math solving purpose we can assume Face value $1000.

1
⎡ 1− (1+ ).061 14.5×2 ⎤
(
Current Value of Bond= 1000×
𝐶𝑜𝑢𝑝𝑜𝑛 𝑅𝑎𝑡𝑒
2 ) ×⎢
⎢ .061
2
2
⎥+
⎥ (1+ )
1000
.061 14.5×2
⎣ ⎦ 2

Or, 1038= 9534.16×Coupon Rate + 418.42

1038 − 418.42
Or, Coupon Rate= 9534.16

Or, Coupon Rate= 0.06498 or 6.5%

(Tanvin Hossin Mim-2016731045)
Question-15: Bond X is a premium bond making semiannual payments. The bond pays a 9
percent coupon, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount
bond making semiannual payments. This bond pays a 7 percent coupon, has a YTM of 9 percent,
and also has 13 years to maturity. What is the price of each bond today? If interest rates remain
unchanged, what do you expect the price of these bonds to be one year from now? In three
years? In eight years? In 12 years? In 13 years? What’s going on here? Illustrate your answers by
graphing bond prices versus time to maturity.

Answer-15:
Bond value = Present value of the coupons + Present value of the face amount
Bond value = C * [ 1 - { 1 / (1 + YTM) t } ] / YTM + MV / (1 + YTM) t

For Bond X,
Semi-annual Coupon Payment, C = 1000 * 9% * 0.5 = 45
Semi-annual YTM = 7% * 0.5 = 3.5% or 0.035
Time, t = 13 * 2 = 26 years
Current Price of Bond X = 45 * [ 1 - { 1 / (1 + 0.035)26 } ] / 0.035 + 1000 / (1 + 0.035)26
= 760.07 + 408.84
= 1168.90
For Bond Y,
Semi-annual Coupon Payment, C = 1000 * 7% * 0.5 = 35
Semi-annual YTM = 9% * 0.5 = 4.5% or 0.045
Time, t = 13 * 2 = 26 years
Current Price of Bond X = 35 * [ 1 - { 1 / (1 + 0.045)26 } ] / 0.045 + 1000 / (1 + 0.045)26
= 530.13 + 318.40
= 848.53

Using the formula, [C * [ 1 - { 1 / (1 + YTM)t } ] / YTM + MV / (1 + YTM)t ], in Microsoft

Excel, we calculated bond price for the required years mentioned in the question.
 Bond X Bond Y

Face Value 1000 1000

Semi-annual Coupon Payment 45 35

Semi-annual YTM 0.035 0.045

After 3 After 12
After 1 years After 8 years After 13 years
Today year (13-1) (13-3) years (13-8) (13-12) (13-13)

Time, t 13 12 9 5 1 0

Time, t for semi-annual

payment (t * 2) 26 24 18 10 2 0

Price of Bond X 1168.90 1160.58 1131.90 1083.17 1019.00 1000.00

Price of Bond X 848.53 855.05 878.40 920.87 981.27 1000.00

Here, it is seen that the price of Bond X is decreasing and the price of Bond Y is increasing as
the time being closer to maturity.

Ghaphical Representaion:
Question-17: Bond J is a 3 percent coupon bond. Bond K is a 9 percent coupon bond. Both
bonds have 15 years to maturity, make semiannual payments, and have a YTM of 6 percent. If
interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds?
What if rates suddenly fall by 2 percent instead? What does this problem tell you about the
interest rate risk of lower-coupon bonds?

Answer-17:
Bond value = C * [ 1 - { 1 / (1 + YTM) t } ] / YTM + MV / (1 + YTM) t
For Bond J,
Semi-annual Coupon Payment, C = 1000 * 3% * 0.5 = 15
Semi-annual YTM = 6% * 0.5 = 3% or 0.03
Time, t = 15 * 2 = 30 years
Current Price of Bond X = 15 * [ 1 - { 1 / (1 + 0.03)30 } ] / 0.03 + 1000 / (1 + 0.03)30
= 294.01 + 411.99
= 706
For Bond K,
Semi-annual Coupon Payment, C = 1000 * 9% * 0.5 = 45
Semi-annual YTM = 6% * 0.5 = 3% or 0.03
Time, t = 15 * 2 = 30 years
Current Price of Bond X = 45 * [ 1 - { 1 / (1 + 0.03)30 } ] / 0.03 + 1000 / (1 + 0.03)30
= 882.02 + 411.52
= 1293.54

If interest rates suddenly rise by 2 percent, the percentage of price change of these bonds is -
For Bond J,
Semi-annual Coupon Payment, C = 1000 * 5% * 0.5 = 25
Semi-annual YTM = 6% * 0.5 = 3% or 0.03
Time, t = 15 * 2 = 30 years
Current Price of Bond X = 25 * [ 1 - { 1 / (1 + 0.03)30 } ] / 0.03 + 1000 / (1 + 0.03)30
=490.01 + 411.99
=902
For Bond K,
Semi-annual Coupon Payment, C = 1000 * 11% * 0.5 = 55
Semi-annual YTM = 6% * 0.5 = 3% or 0.03
Time, t = 15 * 2 = 30 years
Current Price of Bond X = 55 * [ 1 - { 1 / (1 + 0.03)30 } ] / 0.03 + 1000 / (1 + 0.03)30
= 1078.02 + 411.52
= 1489.54

If interest rates suddenly fall by 2 percent, the percentage of price change of these bonds is -
For Bond J,
Semi-annual Coupon Payment, C = 1000 * 1% * 0.5 = 5
Semi-annual YTM = 6% * 0.5 = 3% or 0.03
Time, t = 15 * 2 = 30 years
Current Price of Bond X = 5 * [ 1 - { 1 / (1 + 0.03)30 } ] / 0.03 + 1000 / (1 + 0.03)30
=98 + 411.99
= 509.99
For Bond K,
Semi-annual Coupon Payment, C = 1000 * 7% * 0.5 = 35
Semi-annual YTM = 6% * 0.5 = 3% or 0.03
Time, t = 15 * 2 = 30 years
Current Price of Bond X = 35 * [ 1 - { 1 / (1 + 0.03)30 } ] / 0.03 + 1000 / (1 + 0.03)30
= 686 + 411.52
= 1097.52

From here, it is seen that the higher the coupon rate, the higher the bond price and vice versa.
(Bibak Roy-2016731068)
Question No. 19: Coccia Co. wants to issue new 20-year bonds for some much-needed
expansion projects. The company currently has 8 percent coupon bonds on the market that sell
for $1,075, make semiannual payments, and mature in 20 years. What coupon rate should the
company set on its new bonds if it wants them to sell at par?

Answer: Coupon indicates the annual stated equal interest payment to the bondholders for
purchasing a bond. It is the monetary benefit for taking the risk to invest in a bond. It is similar to
an annuity as each coupon payment equates to the amount of interest paid to the bondholders. As
there are different types of bonds, the specific type of bond that pays coupons is commonly
known as coupon bond or Level Coupon Bond. A coupon is calculated annually and could be
paid either annually or in specific intervals throughout the lifespan of a bond until maturity. After
the maturity period, a bond is generally paid at Face Value or Par Value, written in bond
indenture while issuing the bond.

The coupon rate is the specified rate the issuing authority pays coupon interest to the
bondholders. The coupon rate calculation of the aforementioned bond issued by Coccia Co. is
stated here.

𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒−(𝑃𝑎𝑟 𝑣𝑎𝑙𝑢𝑒*𝑃𝑉𝐼𝐹, 4%, 40)

Coupon Rate = 2* 𝑃𝑎𝑟 𝑣𝑎𝑙𝑢𝑒*𝑃𝑉𝐼𝐹𝐴, 4%, 40

$1075−($1000*0.2083)
= 2* $1000*19.793

$1,075−208.3
= 2* $19,793

$866.7
= 2* $19,793

= 0.08758 * 100

= 8.76%

(Md. Mofazzal Hossain - 2016731054)