BUSI 2503 R: Assignment #2
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Question 1: Bond Valuation
Lens Lease Ltd is planning to issue 7-year bonds with semi-annual coupon payments. The
market interest rate for such bonds is 8%. Coupon payments will be made at a rat...
Lens Lease Ltd is planning to issue 7-year bonds with semi-annual coupon payments. The
market interest rate for such bonds is 8%. Coupon payments will be made at a rate of 9.17%. The
management of Lend Lease Ltd has determined the company needs to raise $875,000 to fund the
purchase of a new office and wants to use the proceeds of the bond issue for that purpose.
i) Calculate the price of these 9.17% coupon bonds
0.0917 x 1000 = 91.7
91.7/2 = 45.85
Interest = = 4%
7 x 2 = 14 payment periods
1 1000
PV = 45.85[ ] +
0.04(1 + 0.04)14 (1 + 0.04)14
= $1061.79
Therefore the price of these 9.17 % coupon bonds is $1061.79
ii) State and explain whether these bonds are premium or discount bonds.
The lower the interest rate of the bond, the higher the bond price will be due to their inverse
relationship. Since the market rate is lower than that of the coupon rate, the bond will sell at a
premium. These bonds are premium bonds because they are sold for a value that is greater than
face value ($1000).
iii) How many of these 9.17% coupon bonds would the company issue?
$875,000 / $1061.79 = 824
Therefore the company would issue 824 bonds to raise the needed amount of funds.
iv) Calculate the price of these bonds, if they paid no coupons to investors. Assume semi-annual
compounding for these zero-coupon bonds.
Face value = 1000
r = 8/2 = 4%
n = 7 x 2 = 14 pay periods
Price = 1000 / (1+ 0.04) ^14
= $577.48
The price of these zero-coupon bonds is $577.48
This study source was downloaded by 100000856922555 from CourseHero.com on 11-19-2022 20:48:33 GMT -06:00
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