An investor has two bonds in his portfolio that have a face value of $1,000 and
ID: 1172800 • Letter: A
Question
An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 7% annual coupon. Bond L matures in 11 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 11 more payments are to be made on Bond L.
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 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
1) What will the value of the Bond L be if the going interest rate is 6%?
Bond L:
Input
N = 11,
I/YR = 6,
PMT = 70,
FV = 1000,
PV of bond = Interest * PVIFA + face value * PVIF
= 70 * 7.8869 + 1000 * 0.52679
= 1078.87
2) What will the value of the Bond S be if the going interest rate is 6%?
Bond S:
Input
N = 1,
I/YR = 6,
PMT = 70,
FV = 1000,
PV of bond = Interest * PVIFA + face value * PVIF
= 70 * 0.9434 + 1000 * 0.9434
=1009.44
3) What will the value of the Bond L be if the going interest rate is 8%?
Bond L:
Input
N = 11,
I/YR = 8,
PMT = 70,
FV = 1000,
PV of bond = Interest * PVIFA + face value * PVIF
= 70 * 7.1390 + 1000 * 0.4289
= 928.63
4) What will the value of the Bond S be if the going interest rate is 8%?
Bond S:
Input
N = 1,
I/YR = 8,
PMT = 70,
FV = 1000,
PV of bond = Interest * PVIFA + face value * PVIF
= 70 * 0.9260 + 1000 * 0.9260
=990.82
What will the value of the Bond L be if the going interest rate is 14%?
Bond L:
Input
N = 11,
I/YR = 14,
PMT = 70,
FV = 1000,
PV of bond = Interest * PVIFA + face value * PVIF
= 70 * 5.4527 + 1000 * 0.2366
= 618.289
What will the value of the Bond S be if the going interest rate is 14%?
Bond S:
Input
N = 1,
I/YR = 14,
PMT = 70,
FV = 1000,
PV of bond = Interest * PVIFA + face value * PVIF
= 70 * 0.8772 + 1000 * 0.8772
=938.60
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