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An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield?
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An investor is considering the purchase of the bond with the face valu...
Solution:
Given details:
- Face value of the bond: 1000
- Coupon rate: 12%
- Maturity period: 5 years
- Required yield: 14%
- Selling price: 990
To find out the maximum price investor should pay, we need to calculate the Present Value (PV) of the bond using the required yield as the discount rate.
Calculation of PV:
- Coupon payment = 12% of face value = 120
- Number of coupon payments = 5
- Maturity value = Face value = 1000
- Required yield = 14%
Using the formula for Present Value of Annuity, we get:
PV of coupon payments = 120 * [(1 - (1/ (1 + 0.14)^5)) / 0.14] = 454.73
Using the formula for Present Value of a single payment, we get:
PV of maturity value = 1000 / (1 + 0.14)^5 = 423.07
Therefore, the maximum price the investor should pay for the bond is:
Maximum price = PV of coupon payments + PV of maturity value = 454.73 + 423.07 = 877.80
As the bond is selling for 990, the yield for the investor would be different from the required yield of 14%.
To calculate the yield, we need to use the formula for Yield to Maturity (YTM) and find the discount rate that equates the present value of the bond to its market price.
Calculation of YTM:
- Coupon payment = 12% of face value = 120
- Number of coupon payments = 5
- Maturity value = Face value = 1000
- Market price = 990
Using the formula for Present Value of a bond, we get:
Market price = (120 / (1 + r)^1) + (120 / (1 + r)^2) + (120 / (1 + r)^3) + (120 / (1 + r)^4) + (1120 / (1 + r)^5)
where r is the yield to maturity.
Solving for r using trial and error or using the financial calculator, we get:
r = 15.23%
Therefore, the yield for the investor would be 15.23% if he buys the bond at the market price of 990. This yield is higher than the required yield of 14%, indicating that the bond is offering a better return than the investor's expectation.
Given details:
- Face value of the bond: 1000
- Coupon rate: 12%
- Maturity period: 5 years
- Required yield: 14%
- Selling price: 990
To find out the maximum price investor should pay, we need to calculate the Present Value (PV) of the bond using the required yield as the discount rate.
Calculation of PV:
- Coupon payment = 12% of face value = 120
- Number of coupon payments = 5
- Maturity value = Face value = 1000
- Required yield = 14%
Using the formula for Present Value of Annuity, we get:
PV of coupon payments = 120 * [(1 - (1/ (1 + 0.14)^5)) / 0.14] = 454.73
Using the formula for Present Value of a single payment, we get:
PV of maturity value = 1000 / (1 + 0.14)^5 = 423.07
Therefore, the maximum price the investor should pay for the bond is:
Maximum price = PV of coupon payments + PV of maturity value = 454.73 + 423.07 = 877.80
As the bond is selling for 990, the yield for the investor would be different from the required yield of 14%.
To calculate the yield, we need to use the formula for Yield to Maturity (YTM) and find the discount rate that equates the present value of the bond to its market price.
Calculation of YTM:
- Coupon payment = 12% of face value = 120
- Number of coupon payments = 5
- Maturity value = Face value = 1000
- Market price = 990
Using the formula for Present Value of a bond, we get:
Market price = (120 / (1 + r)^1) + (120 / (1 + r)^2) + (120 / (1 + r)^3) + (120 / (1 + r)^4) + (1120 / (1 + r)^5)
where r is the yield to maturity.
Solving for r using trial and error or using the financial calculator, we get:
r = 15.23%
Therefore, the yield for the investor would be 15.23% if he buys the bond at the market price of 990. This yield is higher than the required yield of 14%, indicating that the bond is offering a better return than the investor's expectation.
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An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield?
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An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield?.
An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield?.
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An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield?, a detailed solution for An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield? has been provided alongside types of An investor is considering the purchase of the bond with the face value of 1000 with the coupon rate of 12% and maturity period of 5 years. If the investor wants a yield of 14%, What is the maximum price he should be ready to pay for this bond? If the bond is selling for 990 What would be his yield? theory, EduRev gives you an
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