Question

Please answer the following time value of money questions below. Charting out each of the problem elements (ex. N = 10, PV = 500, etc.) will not only help you in answering the questions but will also assist me in following your calculations. 1. Calculate the value of a bond with a coupon rate of 7.5% and market interest rate of 9% that matures in 12 years. 2. What is the value of the bond in question 1 if the market interest rate decreases to 6.5%? What would you call this kind of bond? 3. What is the value of the bond in question 1 if the market interest rate increases to 11%? What would you call this kind of bond? 4. You just purchased an outstanding 20-year bond with a par value of $1,000 for $1,095. Its annual coupon is $60. Calculate the bond's yield to maturity. 5. You just purchased an outstanding 20-year bond with a par value of $1,000 for $1,095. Its annual coupon payment is $60. What is the yield to call if the bond is callable in 5 years at a price of $1,060?

Answer 1

1. Value of Bond having maturity value of 100 will be 89.26.

Coupon	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	107.50
PV factor	1.09	1.19	1.30	1.41	1.54	1.68	1.83	1.99	2.17	2.37	2.58	2.81
Value	6.88	6.31	5.79	5.31	4.87	4.47	4.10	3.76	3.45	3.17	2.91	38.22

2. Value of bond having maturity value of 100 will be 108.16

Coupon/Mat Val	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	107.50
PV factor	1.07	1.13	1.21	1.29	1.37	1.46	1.55	1.65	1.76	1.88	2.00	2.13
Value	7.04	6.61	6.21	5.83	5.47	5.14	4.83	4.53	4.26	4.00	3.75	50.49

3. Value of Bond having maturity value of 100 will be 77.28

Coupon/Mat Val	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	7.50	107.50
PV factor	1.11	1.23	1.37	1.52	1.69	1.87	2.08	2.30	2.56	2.84	3.15	3.50
Value	6.76	6.09	5.48	4.94	4.45	4.01	3.61	3.25	2.93	2.64	2.38	30.73

4. Yield To maturity will be 5.22%

5. Yield to call will be 5.23%