Assume a healthcare organization sold bonds that have a twelve-year maturity, a

Question

Assume a healthcare organization sold bonds that have a twelve-year maturity, a 14% coupon rate with annual payments, and a $1,000 par value.

Suppose that three years after the bonds were issued, the required interest rate fell to 9%. What would be the bonds’ value?

Suppose that three years after the bonds were issued, the required interest rate rose to 17%. What would be the bonds’ value?

What would be the value of the bonds six years after issue in each scenario above, assuming that interest rates stayed steady at either 9% or 17%?

Explanation / Answer

Step -1Computing a Bond's Value
First, we need to find the present value (PV) of the bond's future cash flows. The present value is the amount that would have to be invested today to generate that future cash flow. PV is dependent on the timing of the cash flow and the interest rate used to calculate the present value. To figure out the value, the PV of each individual cash flow must be found. Then, just add the figures together to determine the bond's price.

The present value of your bond = (present value of all interest payments) + (present value of principal repayment at maturity).

Ans a) Suppose that three years after the bonds were issued, the required interest rate fell to 9%. What would be the bonds’ value?

DISCOUNTING RATE OF 1ST 3 YEAR IS 14% AND FOR REST PERIOD IT IS TAKEN AS 9%. THE VALUE OF BOND IS $1097.175. 12TH YEAR CASHFLOW INCLUDES REDEMPTION VALUE $1000 OF BONDS.

ANS.Suppose that three years after the bonds were issued, the required interest rate rose to 17%. What would be the bonds’ value?

DISCOUNTING RATE OF 1ST 3 YEAR IS 14% AND FOR REST PERIOD IT IS TAKEN AS 17%. THE VALUE OF BOND IS $833.349. 12TH YEAR CASHFLOW INCLUDES REDEMPTION VALUE $1000 OF BONDS.

What would be the value of the bonds six years after issue in each scenario above, assuming that interest rates stayed steady at either 9% or 17%?

THE VALUE OF BOND WILL BE SAME AS ABOVE IN BOTH SCENARIO.

YEAR INTEREST PVF PV OF CASHFLOWS 1 140 0.8772 122.808 2 140 0.7695 107.73 3 140 0.675 94.5 4 90 0.7084 63.756 5 90 0.6499 58.491 6 90 0.5963 53.667 7 90 0.547 49.23 8 90 0.5019 45.171 9 90 0.4604 41.436 10 90 0.4224 38.016 11 90 0.3875 34.875 12 1090 0.3555 387.495 1097.175

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