Question

Calculate the fair market value of a 5-year bond that was issued with a face value of $1,000 and a coupon rate of 10% given the different interest rates shown in the table that follows. What do your calculations indicate about the relationship between current interest rates and the value of bonds? (Round answers to 2 decimal places, e.g. 52.25.) Face Value Current Interest Rate Payment Maturity Fair Market Value $1,000 1% $100 5 $ $1,000 2% $100 5 $ $1,000 $100 $1,000 $100 $1,000 $100 $1,000 $1,000 6% 7% 8% $100 5 $ $100 5 $ $100 $100 15$ $1,000 $1,000 9% $1,000 10% $100 5 $

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

D27 B C D E F G Current Interest rate 1% 2% 3% 4% Face value $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 5% 6% Payment | Maturity | Fair Market Value $100.00 $1,436.81 $100.00 $1,377.08 $100.00 $1,320.58 $100.00 $1,267.11 $100.00 $1,216.47 $100.00 $1,168.49 $100.00 $1,123.01 $100.00 $1,079.85 $100.00 5 $1,038.90 $100.00 5 $1,000.00 7% 8% 9% 10% Interest rate and Fair market value of bond is inversely related which means both move in different direction. If interest rate rises the value of bond decreases and vice versa.

Cell reference -

ДА В Face value Current Interest rate Payment Maturity Fair Market Value 1000 0.01 100 =PV(C4, E4,-D4,-B4,0) 1000 0.02 100 5 =PV(C5, E5,-D5,-B5,0) 1000 0.03 100 5 =PV(C6, E6,-D6,-B6,0) 1000 0.04 100 5 =PV(C7,E7,-D7,-67,0) 1000 0.05 100 5 =PV(C8, E8,-D8,-B8,0) 1000 0.06 100 5 =PV(C9, E9,-D9,-B9,0) 1000 0.07 100 5 =PV(C10,E10,-D10,-B10,0) 1000 Jo.08 100 5 =PV(C11, E11,-D11,-B11,0) 100 5 =PV(C12, E12,-D12,-B12,0) 1000 0.1 100 5 =PV(C13, E13,-D13,-B13,0) 1000 0.09 Interest rate and Fair market value of bond is inversely related which means both move in different direction. If interest rate rises the value of bond decreases and vice versa.

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