Question

You are examining two bonds and are concerned about what would happen to their market value (price) if interest rates (yield to maturity) changed. Both bonds pay annual coupon payments. Bond A pays an $80 annual coupon and has 3 years left until it matures. Bond B also pays an $80 annual coupon but has 19 years left until it matures. Calculate the value of both bonds at different interest rates. Round your answers to the nearest whole number and no commas. Market interest rates are 8% What is the value of Bond A? What is the value of Bond B? Market interest rates are 3% What is the value of Bond A? What is the value of Bond B? Market interest rates are 14% What is the value of Bond A? What is the value of Bond B?

Answer 1

1) When market interest rates are 8%: Bond B 8% 19 Annual Yield to Maturity, RATE # of Years to Maturity, NPER Annual coupons, PMT Bond's Maturity Value at the end, FV Annual coupon type, TYPE Bond Price today Bond A 8% 3 $80 $1,000 0 $1,000.00 $80 ($1,000 x 6% --> As coupon is payable on face value of the bonds at coupon rate] $1,000 (Assumed Par value recievable at the end] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. $1,000.00 [Ref: NOTE] NOTE: Bond-A: Bond Price today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv, type) where rate=8%; nper=3; pmt=-80; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflow; type=0 as coupons are paid at the end of each year only. Bond-B: Bond Price today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=8%; nper=19; pmt=-80; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflow; type=0 as coupons are paid at the end of each year only. B D E F G H Bond A Bond B 8% 8% 19 2 Annual Yield to Maturity, RATE 3 # of Years to Maturity, NPER 4 Annual coupons, PMT 5 Bond's Maturity Value at the end, FV 6 Annual coupon type, TYPE 7 Bond Price today =1000*8% =1000*8% ($1,000 x 6% --> As coupon is payable on face value of the bonds at coupon rate) $1,000 $1,000 (Assumed Par value recievable at the end] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. =PV(B2,B3,-B4,-B5,B6) =PV(C2,C3,-C4,-C5,C6) (Ref: NOTE]

2) When market interest rates are 3%: Bond A 3% Annual Yield to Maturity, RATE # of Years to Maturity, NPER Annual coupons, PMT Bond's Maturity Value at the end, FV Annual coupon type, TYPE Bond Price today 3 $80 $1,000 0 $1,141.43 Bond B 3% 19 $80 ($1,000 x 6% --> As coupon is payable on face value of the bonds at coupon rate] $1,000 (Assumed Par value recievable at the end] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. $1,716.19 [Ref: NOTE] NOTE: Bond-A: Bond Price today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv, type) where rate=3%; nper=3; pmt=-80; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflow; type=0 as coupons are paid at the end of each year only. Bond-B: Bond Price today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=3%; nper=19; pmt=-80; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflow; type=0 as coupons are paid at the end of each year only. А. 3% 2 Annual Yield to Maturity, RATE 3 # of Years to Maturity, NPER 4 Annual coupons, PMT 5 Bond's Maturity Value at the end, FV 6 Annual coupon type, TYPE 7 Bond Price today B Bond A Bond B 3% 19 =1000*8% =1000*8% $1,000 x 6% --> As coupon is payable on face value of the bonds at coupon rate] $1,000 $1,000 (Assumed Par value recievable at the end] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. =PV(B2,B3,-B4,-B5,B6) =PV(C2,C3,-C4,-C5,C6) (Ref: NOTE] 0

3) When market interest rates are 14%: Bond A 14% Annual Yield to Maturity, RATE # of Years to Maturity, NPER Annual coupons, PMT Bond's Maturity Value at the end, FV Annual coupon type, TYPE Bond Price today 3 $80 $1,000 Bond B 14% 19 $80 ($1,000 x 6% --> As coupon is payable on face value of the bonds at coupon rate] $1,000 (Assumed Par value recievable at the end] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. $606.98 [Ref: NOTE] $860.70 NOTE: Bond-A: Bond Price today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=8%; nper=3; pmt=-80; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflow; type=0 as coupons are paid at the end of each year only. Bond-B: Bond Price today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=8%; nper=19; pmt=-80; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflow; type=0 as coupons are paid at the end of each year only. A В D E F G H I J K Bond A Bond B 2 Annual Yield to Maturity, RATE 14% 14% 3 # of Years to Maturity, NPER 4 Annual coupons, PMT =1000*8% =1000*8% ($1,000 x 6% --> As coupon is payable on face value of the bonds at coupon rate] 5 Bond's Maturity Value at the end, FV $1,000 $1,000 (Assumed Par value recievable at the end] 6 Annual coupon type, TYPE 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. 7 Bond Price today =PV(B2,B3,-B4,-B5,B6) =PV(C2,C3,-C4,-C5,C6) (Ref: NOTE] 19