Question

Bond valuation An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 12% annual coupon. Bond L matures in 16 years, while Bond S matures in 1 year Assume that only one more interest payment is to be made on Bond S at its maturity and that 16 more payments are to be made on Bond L. a. what will the value of the Bond L be if the going interest rate is 5%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent. what will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent. what will the value of the Bond L be if the going interest rate is 11%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 11%? Round your answer to the nearest cent.

Answer 1

Par Value of L = 1000
Maturity = 16
Coupon = 12%*1000 = 120

Par Value of S = 1000
Maturity = 1
Coupon = 12%*1000 = 120

a)Price of L = PV of Coupons(using annuity formula) + PV of Par Value = 120*(1-(1+5%)^-16/5% + 1000/(1+5%)¹⁶= 1758.64

b) Price of S = PV of Coupons(using annuity formula) + PV of Par Value = 120/(1+5%) + 1000/(1+5%)¹= 1066.67

c)Price of L = PV of Coupons(using annuity formula) + PV of Par Value = 120*(1-(1+9%)^-16/5% + 1000/(1+9%)¹⁶= 1249.38

d) Price of S = PV of Coupons(using annuity formula) + PV of Par Value = 120/(1+9%) + 1000/(1+9%)¹= 1027.52

e)Price of L = PV of Coupons(using annuity formula) + PV of Par Value = 120*(1-(1+11%)^-16/5% + 1000/(1+11%)¹⁶= 1073.79

f) Price of S = PV of Coupons(using annuity formula) + PV of Par Value = 120/(1+11%) + 1000/(1+11%)¹= 1009.01

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