Problem 10-11 Effect of maturity on bond price [LO3] Refer to Table 10-2 a. Assu

Question

Problem 10-11 Effect of maturity on bond price [LO3] Refer to Table 10-2 a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 10-year, a 15-year, and a 20-year time period b.Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. Using column 3, indicate what the bond price will be with a 10-year, a 15-year, and a 20-year period. Input variables: a-1. Bond price from table 10-2 a-2. Bond price from table 10-2 a-3. Bond price from table 10-2 b-1. Bond pricefrom table 10-2 b-2. Bond price from table 10-2 b-3. Bond price from table 10-2 $1,134.20 $1,171.19 $1,196.36 $887.00 $863.78 $850.61 Solution and Explanation: Bond price Bond price Bond price b. Bond price Bond price Bond price

Explanation / Answer

The bond price can be calculated with the use of Present Value function/formula of EXCEL/Financial Calculator. The function/formula for PV is PV(Rate,Nper,PMT,FV) where Rate = Interest Rate (here, YTM), Nper = Period, PMT = Payment (here, Coupon Payment) and FV = Future Value (here, Face Value of Bonds).

_____

____

Notes:

The above function for PV (Bond Price) will produce a negative result which has to be ignored. The values will, however, be the same.

Solution and Explanation a. Function Used (Explanation) Bond Price $1,134.20 =pv(8%,10,100,1000) Bond Price $1,171.19 =pv(8%,15,100,1000) Bond Price $1,196.36 =pv(8%,20,100,1000) b. Bond Price $887.00 =pv(12%,10,100,1000) Bond Price $863.78 =pv(12%,15,100,1000) Bond Price $850.61 =pv(12%,20,100,1000)

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.