A bond of Telink Corporation pays $100 in annual interst, witha $1000 par value.
ID: 2778003 • Letter: A
Question
A bond of Telink Corporation pays $100 in annual interst, witha $1000 par value. The bonds mature in 15 years. The marekt's required yield to maturity on a comparble-risk bond is 9%.
a. Calcuate the value of the bond. - What is the value of the bond if the market's required to maturity on comparable-risk bond is 9%.
b. How does the value change if the market's rquired yield to amturity on a comprable-risk bond (i) increases to 12% or (ii) decrease to 5%?
C. Intrret our findings in parts a and b.
Explanation / Answer
Intereest on Bond =1000*10%
=100
Interest will accrue for 15 years and NPV of the same can be calculated as below
As the required yield to maturity on a comparable risk bond is 9% we have to discount the Cash flow by using the PV of 9%
Interest for 15 years will be 100
NPV of Interest= 100*8.0607
= 806.07
NPV of Face Value of Bond at the end of 15th Year = 1000*0.2745
=274.50
Value of Bond = 274.50+806.07
=1080.57
(b) If Yield to Maturity changes to 12% then valuation of Bond will be as under
NPV of Interest payment at 12% = 100*5.6502
=565.02
NPV of Bond face value at the end of 15th Year= 1000*0.1827
=182.70
Value of Bond= 182.70+565.02
=747.72
Value of Bond if Yield to maturity on comparable risk bond is 5%
Value of Bond= PV of Interest Payment + PV of Cost of Bond at the end of 15th Year
= (100*10.3797)+(1000*0.4810)
= 1037.97+481
= 1518.97
(c) If you See in Part A where the Required rate of return was 9% the bond valuation was 1080.57 whereas when the required rate of return increases to 12% the Bond value decreases to 747.72 and as compared to that when the required rate of return decreases to 5% the value of Bond increases to 1518.97. Thus there is an inverse relationship between the value of Bond and the required rate of return when the required rate of return increases the value of Bond decreases and when the required rate of return decrease the value of Bond increases.
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