10-4B
Expert-verifiedA coupon bond paying semi-annual interest is reported as having an ask price of 117% of its $1,000 par value. If the last interest payment was made one month ago and the coupon rate is 6%, what is the invoice price of the bond?
$11, 174.95
Coupon rate = 6%
Interest payment = Semi-annual (0.5)
Bond Price = $1000
Ask Price = 117%
Semi-annual coupon payment = Coupon Payment/2
= $1000 x 6% x 0.5
= $ 30
Accrued interest = Semi-annual coupon payment / 2 x Days since last coupon payment / Days separating coupon payment
= 30 x 30 /182
= $4.945
At a price of 117,
Invoice price = $1170 + $4945
= $11, 174.95
Question: A large corporation issued both fixed- and floating-rate notes five years ago, with terms given in the following table:
9% Coupon Notes | Floating Rate note | |
Issue size | 250 million | 280 Million |
Maturity | 20 Years | 15 Years |
Current Price (% of par | 93 | 98 |
Current Coupon | 9% | 8% |
Coupon Adjusts | Fixed coupon | Every year |
Coupon reset rule | ----- | 1 Year T bill rate + 2% |
Callable | 10 Years after issue | 10 Years after issue |
Call Price | 106 | 102 |
Sinking fund | None | None |
Yield to Maturity | 9.9% | --------- |
Price range since issued | $85 - $112 | $97 - $102 |
a. Why is the price range greater for the 9% coupon bond than the floating-rate note?
b. What factors could explain why the floating-rate note is not always sold at par value?
c. Why is the call price for the floating-rate note not of great importance to investors?
d. Is the probability of call for the fixed-rate note high or low?
e. If the firm were to issue a fixed-rate note with a 15-year maturity, callable after five years at 106, what coupon rate would it need to offer to issue the bond at par value?
f. Why is an entry for yield to maturity for the floating-rate note not appropriate?
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