Question

Part 2 Problem (15 pts) You must show all of the steps for full credit. You must show how to do these calculations the manual way using the PV Tables and then in Excel using a spreadsheet like the one we used to complete Exercise 14-2. Determine the price of a $1,000,000 bond issue under each of the following independent assumptions: Maturity Interest Paid Stated Rate Effective Rate 1. 10 years annually 8% 6% 2. 10 years semiannually 6% 8% 3. 20 years semiannually 8% 8%

Answer 1

All the parts of first question has been answered.

Answer to Part 2 Problem

By using the PV factors from the table, the solution is

Case 1 n Table values are based on 10 years i 6% per annum Cash Flow Amount Interest $ 80,000 (1000000*8%) Principal $ 1,000,000 PV Factors 7.36009 $ Present Value 588,807 (80000*7.36009) 558,390 (1000000*0.55839) 1,147,197 0.55839 $ Price of Bond $ The price of the bond is $ 1,147,197 Case 2 Table values are based on n 20 half years i 4% per annum Cash Flow Amount Interest $ 30,000 (1000000*3%) Principal $ 1,000,000 PV Factors 13.59033 $ Present Value 407,710 (30000*13.59033) 456, (1000000*0.45639) 864,100 0.45639 $ Price of Bond $ $ The price of the bond is $ 864,100 Case 3 n Table values are based on 40 half years i 4% per annum Cash Flow Amount Interest $ 40,000 (1000000*4%) Principal $ 1,000,000 PV Factors 13.59033 $ Present Value 543,613 (40000*13.59033) 456,390 (1000000*0.45639) 1,000,003 0.45639 $ Price of Bond $ The price of the bond is $ 1,000,003

By using the excel formulas,

A B C D E F G 1 2 Case 1 3 4 5 Cash Flow Interest Principal Price of Bond Amount PV Factors =(1000000*8%) =ROUND(PV(6%,10,-1,0,0),5) 1000000 =ROUND(PV(6%,10,0,-1,0),5) Present Value =ROUND(C5*D5,0) =ROUND(C6*D6,0) =E6+E5 6 7 8 9 The price of the bond is $ 1,147,197 Case 2 10 11 12 13 14 15 16 Cash Flow Interest Principal Price of Bond Amount PV Factors =(1000000*3%) =ROUND(PV(4%,20,-1,0,0),5) 1000000 =ROUND(PV(4%,20,0,-1,0),5) Present Value =ROUND(C14*D14,0) =ROUND(C15*D15,0) =E15+E14 The price of the bond is $ 864,100 Case 3 17 18 19 20 21 22 23 24 25 26 27 28 Cash Flow Interest Principal Price of Bond Amount PV Factors = (1000000*4%) =ROUND(PV(4%,20,-1,0,0),5) 1000000 =ROUND(PV(4%,20,0,-1,0),5) Present Value =ROUND(C23*D23,0) =ROUND(C24*D24,0) =E24+E23 The price of the bond is $ 1,000,003