Question

The Apollo Inc.'s bonds have four years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; the coupon rate is 9%. (a) What is the yield to maturity at a current market price of $828.70? (b) If the yield to maturity for the bond is 10% and stays at 10% for the coming year, calculate the market price of the bond at the end of the year. -Ponrate PM- (c) Suppose a year has passed and the bond price has increased to $840 each. What rate of return would an investor have earned for the past year if he/she purchased the bond a year ago at $828.70? FV- a 2. Simmons, Inc. wants to issue sixty 10-year, $1,000 face value zero-coupon bonds. If investors require a rate of return of 12% for the bonds, how much will the firm receive (ignoring issuance costs) when the bonds are first sold?

Answer 1

The yield to maturity of Apollo Inc.'s bonds at a market price of $828.70 is approximately 12.03%. If the yield to maturity is 10% and stays the same for the coming year, the market price of the bond at the end of the year would be approximately $964.15. If the bond price increases to $840 after a year, the rate of return for the investor would be approximately 1.24%. Simmons, Inc. will receive a total of $60,000 when the sixty 10-year zero-coupon bonds are first sold.

Step-by-step explanation:

(a) To calculate the yield to maturity of Apollo Inc.'s bonds, we can use the present value formula. At a current market price of $828.70, the yield to maturity can be found by solving for the discount rate that makes the present value of the bond's future cash flows equal to the market price. In this case, the future cash flows include the annual coupon payments and the final principal payment. Assuming a 9% coupon rate, the yield to maturity is approximately 12.03%.

(b) If the yield to maturity is 10% and stays at 10% for the coming year, the market price of the bond at the end of the year can be calculated by discounting the expected future cash flows at the 10% yield to maturity. The expected future cash flows include the annual coupon payments and the final principal payment. Using the present value formula, the market price of the bond at the end of the year would be approximately $964.15.

(c) If the bond price has increased to $840 after a year, the rate of return for the investor can be calculated using the formula: (New Price - Purchase Price) / Purchase Price. In this case, the rate of return would be approximately 1.24%.

4. Simmons, Inc. will receive the face value of the bonds, which is $1,000, for each of the sixty 10-year zero-coupon bonds. Therefore, the firm will receive a total of $60,000 when the bonds are first sold.