A $1,000 bond has rates are currently 5 percent. a) What will the price of this
ID: 2656943 • Letter: A
Question
A $1,000 bond has rates are currently 5 percent. a) What will the price of this bond be if the interest is paid annually? b) What will the price be if investors expect that the bond will be called with no call 2. a coupon rate of 7 percent and matures after eight years. Interest penalty after two years? What will the price be if investors expect that the bond will be called after two years and there will be a call penalty of one year's interest? Why are your answers different for questions (a), (b), and (c)? c) d)Explanation / Answer
1-
Price of bond
Using rate function in MS excel
pv(rate,nper,pmt.fv,type) rate = 5% nper = 8 pmt =-70 fv = -1000 type = 0
PV(5%,8,70,1000,0)
($1,129.26)
2-
Price of bond
Using rate function in MS excel
pv(rate,nper,pmt.fv,type) rate = 5% nper = 2 pmt =70 fv = 1000 type = 0
PV(5%,2,70,1000,0)
($1,037.19)
3-
Price of bond
Using rate function in MS excel
pv(rate,nper,pmt.fv,type) rate = 5% nper = 2 pmt =70 fv = 1000 +70 = 1070 type = 0
PV(5%,2,70,1000,0)
($1,100.68)
4-
answers are different in above three scenarios because pmt = period of payment has reduced and amount of future payment has changed
1-
Price of bond
Using rate function in MS excel
pv(rate,nper,pmt.fv,type) rate = 5% nper = 8 pmt =-70 fv = -1000 type = 0
PV(5%,8,70,1000,0)
($1,129.26)
2-
Price of bond
Using rate function in MS excel
pv(rate,nper,pmt.fv,type) rate = 5% nper = 2 pmt =70 fv = 1000 type = 0
PV(5%,2,70,1000,0)
($1,037.19)
3-
Price of bond
Using rate function in MS excel
pv(rate,nper,pmt.fv,type) rate = 5% nper = 2 pmt =70 fv = 1000 +70 = 1070 type = 0
PV(5%,2,70,1000,0)
($1,100.68)
4-
answers are different in above three scenarios because pmt = period of payment has reduced and amount of future payment has changed
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