Other things remaining the same, higher is the required return a. lower is the value of...
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Other things remaining the same, higher is the required return
a. lower is the value of a bond
b. higher is the value of a stock
c. lower is the value of a stock
d. both a and c
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M=1000, n=20, coupon rate = .08, discount rate = .06. The value of the bond is approximately
a. 1229.4
b. 917.6
c. 1129.4
d. none of the above
Homework Answers
A) Option d is correct
Higher the required rate of return, will lower the Value of Bond as well as Stock.
Explanation
At 6%,
Value of Bond = $ 1,229.39 (Solved Below)
At 8%,
Value of Bond = $ 999.95
B) Value of the Bond
Value of Bond = Interest * PVIFA(6%,20) + M*PVIF(6%,20)
Interest = 1000*8% = $ 80
Value of Bond = 80 * 11.4699 + 1000 * 0.3118
Value of Bond = $ 1,229.39
Therefore, Option a is correct.
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