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Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley. Assume you are thinking about bu

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Answer #1

(a)-Value of Microsoft Bond if the required rate of return on the Bond is 7.00%

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $1,000

Annual Coupon Amount = $55 [$1,000 x 5.50%]

Annual Yield to Maturity of the Bond = 7.00%

Maturity Period = 29 Years

The Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $55[PVIFA 7.00%, 29 Years] + $1,000[PVIF 7.00%, 29 Years]

= [$55 x 12.27767] + [$1,000 x 0.14056]

= $675.27 + $140.56

= $815.83

“Hence, the Value of Microsoft Bond will be $815.83”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

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