An investor has two bonds in his portfolio that have a face value of $1,000 and
ID: 1171866 • Letter: A
Question
An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 13 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 13 more payments are to be made on Bond L.
What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent.
$
What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent.
$
What will the value of the Bond L be if the going interest rate is 8%? Round your answer to the nearest cent.
$
What will the value of the Bond S be if the going interest rate is 8%? Round your answer to the nearest cent.
$
What will the value of the Bond L be if the going interest rate is 14%? Round your answer to the nearest cent.
$
What will the value of the Bond S be if the going interest rate is 14%? Round your answer to the nearest cent.
$
Explanation / Answer
Bond L:
Par Value = $1,000
Annual Coupon = 9% * $1,000 = $90
Time to Maturity = 13 years
If Interest Rate is 4%:
Price of Bond = $90 * PVIFA(4%, 13) + $1,000 * PVIF(4%, 13)
Price of Bond = $90 * (1 - (1/1.04)^13) / 0.04 + $1,000 / 1.04^13
Price of Bond = $1,499.28
If Interest Rate is 8%:
Price of Bond = $90 * PVIFA(8%, 13) + $1,000 * PVIF(8%, 13)
Price of Bond = $90 * (1 - (1/1.08)^13) / 0.08 + $1,000 / 1.08^13
Price of Bond = $1,079.04
If Interest Rate is 14%:
Price of Bond = $90 * PVIFA(14%, 13) + $1,000 * PVIF(14%, 13)
Price of Bond = $90 * (1 - (1/1.14)^13) / 0.14 + $1,000 / 1.14^13
Price of Bond = $707.88
Bond S:
Par Value = $1,000
Annual Coupon = 9% * $1,000 = $90
Time to Maturity = 1 year
If Interest Rate is 4%:
Price of Bond = $90 * PVIF(4%, 1) + $1,000 * PVIF(4%, 13)
Price of Bond = $90 / 1.04 + $1,000 / 1.04
Price of Bond = $1,048.08
If Interest Rate is 8%:
Price of Bond = $90 * PVIF(8%, 1) + $1,000 * PVIF(8%, 13)
Price of Bond = $90 / 1.08 + $1,000 / 1.08
Price of Bond = $1,009.26
If Interest Rate is 14%:
Price of Bond = $90 * PVIF(14%, 1) + $1,000 * PVIF(14%, 13)
Price of Bond = $90 / 1.14 + $1,000 / 1.14
Price of Bond = $956.14
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