I’ve already put this question on here once and the answers I was given on the n
ID: 2814089 • Letter: I
Question
I’ve already put this question on here once and the answers I was given on the numbers were wrong (1141.65, 1092.00, 119365). Assuming that the current interest rate is 2 percent, compute the present value of a five-year, 5 percent coupon bond with a face value of $1,000 What happens when the interest rate goes to 3 percent? What happens when the interest rate goes to 1 percent? Instructions: Enter your responses rounded to the nearest penny (two decimal places). PV at an interest rate of 2%-$ PV at an interest rate of 3% $ The present value percent. (Click to select) when the interest rate rises to 3 PV at an interest rate of 1%-$ The present value percent. (Click to select) # when the interest rate falls to 1
Explanation / Answer
PV at an Interest Rate of 2%
Present Value of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value
= $50[PVIFA 2%, 5 Years] + $1,000[PVIF 2%, 5 Years]
= [$50 x 4.7134595] + [$1,000 x 0.905730]
= $235.67 + 905.73
= $1,141.40
PV at an Interest Rate of 3%
Present Value of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value
= $50[PVIFA 3%, 5 Years] + $1,000[PVIF 3%, 5 Years]
= [$50 x 4.5797071] + [$1,000 x 0.862608]
= $228.99 + 862.61
= $ 1,091.59
The Present Value DECREASES when the Interest rate rises to 3%
PV at an Interest Rate of 1%
Present Value of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value
= $50[PVIFA 1%, 5 Years] + $1,000[PVIF 1%, 5 Years]
= [$50 x 4.853431] + [$1,000 x 0.951465]
= $242.67 + 951.47
= $ 1,194.14
The Present Value INCREASES when the Interest rate rises to 3%
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