Question

Assume that coupon interest payments are made semiannually and that par value is $1,000 for both bonds. Coupon rate Time to maturity Required return Bond A 4.50% 5 years 7.038 Bond B 4.508 25 years 7.03% a. Calculate the values of Bond A and Bond B. (Round your answers to 2 decimal places.) Bond value A Bond value B b. Recalculate the bonds' values if the required rate of return changes to 8.72%. (Round your answers to 2 decimal places.) Bond value A Bond value B c. Calculate the increase or decrease in bond value based on the change in required return. (Round your answers to 2 decimal places.) $ D Bond value A Bond value B (Click to select) (Click to select) :)

Answer 1

Bond Price = Interest * PVIFA(YTM, Years) + Par Value * PVIF(YTM, Years)

a.

Bond A = (1,000 * 4.5%) * PVIFA(7.03%,5) + 1000 * PVIF(7.03%,5)

= 45 * 4.09691 + 1000 * 0.71199

Bond A = $896.35

Bond B = (1,000 * 4.5%) * PVIFA(7.03%,25) + 1000 * PVIF(7.03%,25)

= 45 * 11.62216 + 1000 * 0.18296

Bond A = $705.96

b.

Bond A = (1,000 * 4.5%) * PVIFA(8.72%,5) + 1000 * PVIF(8.72%,5)

= 45 * 3.91808 + 1000 * 0.65834

Bond A = $834.65

Bond B = (1,000 * 4.5%) * PVIFA(8.72%,25) + 1000 * PVIF(8.72%,25)

= 45 * 10.04966 + 1000 * 0.12367

Bond A = $575.90

c.

Bond A Value = Decrease from $896.35 to $834.65

Bond B Value = Decrease from $705.96 to $575.90