Question

(Bond valuation) You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 20 years. Your required rate of return is 12 percent aleos Edg a. Calculate the value of the bond. b. How does the value change if your required rate of return (1) increases to 15 percent or (2) decreases to 7 percent? c. Explain the implications of your answers in part (b) as they relate to interest rate risk, premium bonds, and discount bonds EPI d. Assume that the bond matures in 3 years instead of 20 years. Recompute your answers in part (b). GAME e. Explain the implications of your answers in part (d) as they relate to interest rate risk, premium bonds, and discount bonds. a. If your required rate of return is 12 percent, what is the value of the bond? unch (Round to the nearest cent.)

Answer 1

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BOND - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Calibri Dr General Wrap Text Merge & Center - BI U $ % , :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles AutoSum - A Fill Sort & 2 Clear Filter Editing -11AA = = = D- DA Font fax AQ AR Find & Select Alignment Number E Copy Paste Format Painter Clipboard AU49 AO 47 Cells AP AS AT AU AV AW AX AY AZ 48 FV 49 1000 100 20 12% COUPON LIFE YTM 50 (a) VALUE OF BOND $ 850.61 EXCEL =PV(AS51, AS50,-AS49,-AS48) 51 52 53 54 55 56 57 (b)(i) IF YTM INCREASES TO VALUE OF BOND 15% $ 687.03 EXCEL=PV(AS55, AS50,-AS49,-AS48) 58 (b)(ii) IF YTM DECREASES TO VALUE OF BOND 7% $ 1,317.82 EXCEL = PV(AS58,AS50,-AS49,-AS48) 59 60 61 62 63 (c) WHEN THE YTM = 15%: BOND IS TRADING AT A DISCOUNT AS YTM > COUPON RATE. SO IT IS A DISCOUNT BOND WHEN THE YTM = 7%: BOND IS TRADING AT A PREMIUM AS YTM < COUPON RATE. SO IT IS A PREMIUM BOND 64 AS THE LIFE IS HIGHER, THE BONDS HAVE HIGHER INTEREST RATE RISK COMPARED TO LOWER MATURITY BONDS 65 ► Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARRANT refund 0 0 YIELD SPOT ferences S4 S5 S6 BOU 130% Rea -_ 0 ELEB * * QENG 06-11-2019

BOND - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Dr General Wrap Text Fat Merge Merge & Center Center st $ - % $ % , .0 .00 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & Find & 2 Clear Filter Select Editing Alignment Number Cells -11AA = = = U - D A E = 5 Font foc AR LIFE IS NOW 3 YEARS AS AT HO mula Bar AV AW AX AY AZ Calibri E Copy Paste Format Painter B I Clipboard AW69 AP AQ 68 69 70 71 72 BA FV 1000 100 COUPON LIFE YTM 12% 73 74 (d) VALUE OF BOND $ 951.96 EXCEL =PV(AS72,AS71,-AS70,-AS69) 76 IF YTM INCREASES TO VALUE OF BOND 15% $ 885.84 77 78 EXCEL =PV(AS76, AS71,-AS70,-AS69) 79 IF YTM DECREASES TO VALUE OF BOND 7% $ 1,078.73 80 EXCEL = PV(AS79,AS71,-AS70,-AS69) 81 (e) 82 83 WHEN THE YTM = 15%: BOND IS TRADING AT A DISCOUNT AS YTM > COUPON RATE. SO IT IS A DISCOUNT BOND WHEN THE YTM = 7%: BOND IS TRADING AT A PREMIUM AS YTM < COUPON RATE. SO IT IS A PREMIUM BOND 84 85 86 H Rea YIELD SPOT ferences AS THE LIFE IS LOWER, THE BONDS HAVE LOWER INTEREST RATE RISK COMPARED TO HIGHER MATURITY BONDS WE CAN SEE 2 RESULTS, THE PRICE CHANGE IS SMALLER IN CASE OF LOWER MATURITY BONDS Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE 510 BIDDING, UNDERWRITING EUAC AW LIFELP, IP, MRP, INFLATION WARRANT refund 54 55 56 I BOI 130% 0 + ODER 9 * * OENG 06-11-2019)