Question

7.3

value of the cash flows the asset is expected to produce. For a bond with fixed annual coupons, its value is equal to the present value of all its annual interest payments and its maturity The value of any financial asset is the present value as shown in the equation below: INT (1+r)^ M (1+ra) Bond's value=Ve=INT + INT. +...+ (1+ra)' (1+ra) INT + M = (1+ra)* (1+ra)N We could use the valuation equation shown above to solve for a bond's value; however, it is more efficient to use a financial calculator. Simply enter N as years to maturity, I/YR as the going annual interest rate, PMT as the annual coupon payment (calculated as the annual coupon interest rate times the face value of the bond), and FV as the stated maturity value. Once those inputs are entered in your financial calculator, you can solve for PV, the value of the bond. Remember that the signs for PMT and FV should be the same, so PV will have an opposite sign. Typically, you would enter PMT and FV as positive numbers, so PV would be shown as a negative value. The negative sign means that you are purchasing the bond, so the purchase price of the bond is paid out of your funds (thus the negative sign) and is received by the issuing firm (a positive flow to the firm). Note that we calculated the bond's value assuming coupon interest payments were paid annually; however, most bonds pay interest on a semiannual basis. Therefore, to calculate the value of a semiannual bond you must make the following changes: N should reflect the number of interest payment periods so multiply years to maturity times 2, I/YR should reflect the periodic going rate of interest so divide the going annual interest rate by 2, and PMT should reflect the periodic interest payment so divide the annual interest payment by 2. For fixed-rate bonds it's important to realize that the value of the bond has a(n) inverse relationship to the level of interest rates. If interest rates rise, then the value of the bond falls ; however, if interest rates fall, then the value of the bond rises A discount bond is one that sells below its par value. This situation occurs whenever the going rate of interest is above the coupon rate. Over time its value will increase approaching its maturity value at maturity. A premium bond is one that sells above its par value. This situation occurs whenever the going rate of interest is below the coupon rate. Over time its value will decrease approaching its maturity value at maturity. A par value bond is one that sells at par; the bond's coupon rate is equal to the going rate of interest. Normally, the coupon rate is set at the going market rate the day a bond is issued so it sells at par initially. Quantitative Problem: Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 7.6%, what is the value of the bond? Do not round intermediate calculations. Round your answer to the nearest cent. Quantitative Problem: Potter Industries has a bond issue outstanding with a 6% coupon rate with semiannual payments of $30, and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 7.6%, what is the value of the bond? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

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File Home Insert Page Layout Formulas Data - 2x fic 2 O ? A o BA PLUS - Microsoft Excel (Product Activation Failed) Review View Add-Ins a Define Name Trace Precedents 5 Show Formulas f Use in Formula Trace Dependents Error Checking Math More Name & Trig Functions Manager Create from Selection Remove Arrows" Evaluate Formula Defined Names Formula Auditing @ 3 Calculate Now Insert Function Watch Window Calculation Calculate Sheet Options Calculation AutoSum Recently Financial Logical Text Date & Lookup & Used - Time Reference Function Library E57 A B C D E F 51 52 53 54 55 BLANKS 1 INVERSE 2 FALLS 3 RISES 4 DISCOUNT 5 INCREASE 6 PREMIUM 7 DECREASES 56 57 58 59 O 60 61 62 ANNUAL BOND SET PAY = C/Y = 1 PMT =-60, FV =-1000, I/Y = 7.6, N = 10 63 CPT PV = 890.67 64 65 66 SEMI ANNUAL BOND SET P/Y = C/Y = 2 PMT = -30 [60/2], FV=-1000, I/Y = 7.6, N = 20 (10 X 2] CPT PV = 67 889.33 68 69 ► NPV Sheet4 BOND PV FV ferences Rea OH 130% . E X . a * 0 ENG 02:26 29-10-2019