Question

(Bond valuation) You are examining three bonds with a par value of $1,000 (you r rate changed. The three bonds are ive $1.000 a maturity) and are concerned with what would happen to the market value interest rates for the market discount Bond A Bond B Bond c abond with 4 years of to maturity that has an annual coupon interest rate of percent, but the interest is paid semiannual abond with 11 years of tomatunity that has an annual coupon interest rate of porcent, but the interests paid semiannually a bond with 18 years of tomaturity that has an annual coupon interest rate of percent, but the rest is paid semiannually What would be the value of these bonds the market discount rate were a. 8 percent per your compounded semiannually? b. 7 percent per year compounded semiannually c. 17 percent per year compounded semiannually? d. What observations can you make about these results? a. If the market discount rate wore 8 percent per your compounded servannually, the value of Bond ABS (Round to the nearest cont.)

Answer 1

Semi annual Coupon rate =8%/2=4%

Say, the equivalent semi annual market discount rate is x, then

(1+x)^2-1=8% or, x= 3.92%

Hence, Coupon(PMT)=4%*1000=40, Tenure(nper)=4*2=8 , Future Value=$1000, rate=3.92%, PV=?

3.92% 401 Α 1 rate 2 PMT 3 EV 4 nper 5 PV 1000 =PV(B1,B4,B2,B3,0) PV(rate, nper, pmt, [fv], [type])

Α 1 rate 2 PMT 3 FV 4 nper 5 PP B 3.92% 40 1000 |($1,005.20)

Hence, the value of Bond A is $1005.20. Similarly, the value of Bond B and C are given below:

ДА В 1 Bond B 2 rate 3.92% 3 PMT 4 EV 1000 5 nper 22 6 PV ($1,011.20) 40 rate PMT FV nper PV Bond C 3.92% 40 1000 36 ($1,014.71) 7.