Click here to read the eBook: Bond Valuation BOND VALUATION An investor has two

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Click here to read the eBook: Bond Valuation BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon Bond L matures in 16 years, while Bond S matures in 1 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 6%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 6%? Round your answer to the nearest cent. what will the value of the Bond L be if the going interest rate is 10%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 10%? Round your answer to the nearest cent. What will the value of the Bond L be if the going interest rate is 14%? your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 14967 Round your answer to the nearest cent o ? here to search DOLL

Explanation / Answer

Bond L
Face Value, FV = $1,000
Annual Coupon Payment = 10% of 1000 = $100
Period, n = 16

Bond S
Face Value, FV = $1,000
Annual Coupon Payment, PMT = 10% of 1000 = $100
Period, n = 1

Value of Bond = PV of Annuity Coupon Payments + PV of face value maturity

Present Value of Annuity, PV = PMT/ i * [1 - (1+i)-n]

Present Value of Future Value, PV = FV * (1+i)-n

If i = 6%

1)
Value of Bond L = PV of Annuity Coupon Payments + PV of face value maturity
Value of Bond L = PMT/ i * [1 - (1+i)-n] + FV * (1+i)-n
Value of Bond L = 100/ 0.06 * [1 - (1+0.06)-16] + 1000 * (1+0.06)-16
Value of Bond L = 1666.67 * [1 - 0.3936] + 1000 * 0.3936
Value of Bond L = 1666.67 * 0.6064 + 1000 * 0.3936
Value of Bond L = 1010.59 + 393.65
Value of Bond L = 1404.24

2)
Value of Bond S = PV of Annuity Coupon Payments + PV of face value maturity
Value of Bond S = PMT/ i * [1 - (1+i)-n] + FV * (1+i)-n
Value of Bond S = 100/ 0.06 * [1 - (1+0.06)-1] + 1000 * (1+0.06)-1
Value of Bond S = 1666.67 * [1 - 0.9434] + 1000 * 0.9434
Value of Bond S = 1666.67 * 0.0566 + 1000 * 0.9434
Value of Bond S = 94.34 + 943.40
Value of Bond S = 1037.74

If i = 10%

3)
Value of Bond L = PV of Annuity Coupon Payments + PV of face value maturity
Value of Bond L = PMT/ i * [1 - (1+i)-n] + FV * (1+i)-n
Value of Bond L = 100/ 0.10 * [1 - (1+0.10)-16] + 1000 * (1+0.10)-16
Value of Bond L = 1000 * [1 - 0.2176] + 1000 * 0.2176
Value of Bond L = 1000 * 0.7824 + 1000 * 0.2176
Value of Bond L = 782.37 + 217.63
Value of Bond L = 1000

4)
Value of Bond S = PV of Annuity Coupon Payments + PV of face value maturity
Value of Bond S = PMT/ i * [1 - (1+i)-n] + FV * (1+i)-n
Value of Bond S = 100/ 0.10 * [1 - (1+0.10)-1] + 1000 * (1+0.10)-1
Value of Bond S = 1000 * [1 - 0.9091] + 1000 * 0.9091
Value of Bond S = 1000 * 0.0909 + 1000 * 0.9091
Value of Bond S = 90.91 + 909.09
Value of Bond S = 1000

If i = 14%

5)
Value of Bond L = PV of Annuity Coupon Payments + PV of face value maturity
Value of Bond L = PMT/ i * [1 - (1+i)-n] + FV * (1+i)-n
Value of Bond L = 100/ 0.14 * [1 - (1+0.14)-16] + 1000 * (1+0.14)-16
Value of Bond L = 714.29 * [1 - 0.1229] + 1000 * 0.1229
Value of Bond L = 714.29 * 0.8771 + 1000 * 0.1229
Value of Bond L = 626.51 + 122.89
Value of Bond L = 749.40

6)
Value of Bond S = PV of Annuity Coupon Payments + PV of face value maturity
Value of Bond S = PMT/ i * [1 - (1+i)-n] + FV * (1+i)-n
Value of Bond S = 100/ 0.14 * [1 - (1+0.14)-1] + 1000 * (1+0.14)-1
Value of Bond S = 714.29 * [1 - 0.8772] + 1000 * 0.8772
Value of Bond S = 714.29 * 0.1228 + 1000 * 0.8772
Value of Bond S = 87.72 + 877.19
Value of Bond S = 964.91

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