PROBLEM 7-4 BOND VALUATION Calculate the value of a bond that wil mature in 14 y

Question

PROBLEM 7-4 BOND VALUATION Calculate the value of a bond that wil mature in 14 years and has a $1,000 face value. The annual coupon interest rate is 5 percent, and the investor's required rate of return is 7 percent. A4 DATA Years to Face value Coupon rate Required rate of return S1,000 5.0% 70% SOLUTION Coupon payment Current value of the bond PV(rate, nper, pmt, [fvl, Itype]) Requirements 1. Start Excel. Download and open the workbook named: Keown Martin Petty_Problem 7-4 Start. Important note: Al calculations must be shown using cell references. Do NOT enter absolute numbers in the cells. 2. In cell B13, calculate the annual coupon payment. (1 point) 3. In cell B14, input the function PV to calculate the current value of the bond. 1 point) Note: The output of the expression or function you typed in this cell is expected as a positive number. 4. Save the workbook. Close the workbook and then exit Excel. Submit the workbook as directed.

Explanation / Answer

Formula in excel:

Feed or select cells as per below:

Required rate of return = Rate = 7%

Years to maturity = nper = 14

Coupon payment = pmt = -$50

Face value = fv = -$1000

Hence;

=PV(7%,14,-50,-1000)

= $825.09

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As no maturity date is mentioned for preferred stock, I am assuming it is perpetuity case:

.

Annual dividend payment = Dividend rate * Par Value = 14% * $100 = $14

Present value of preferred stock = Annual dividend payment / Annual discount rate = $14/12%

Present value of preferred stock = $116.67

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