The bnshave 51,000 par vauens and Tcopon irtenest raes and pay an ere Bond value
ID: 2615622 • Letter: T
Question
The bnshave 51,000 par vauens and Tcopon irtenest raes and pay an ere Bond value and time Changing required returns Perional Finance Problem Lyn Parsons is considering inveting in ether of two oudstanding bonds Bond A has exacty 6 years to maturity, and bond B has 16 years to maurey a. Calaane tepesent value of tondAfhenequiedtateofreun is (1) 10%,(20 13%,and (3 16% b. Calculate the present value of bond B t the reared rate ofretumes:01)10%ay3% and a.es C. From your findings in parts a and b discuss the relahonship between tme to maturity and changing sequired retuns d. If Lynn wanted to minimine interest rate rok, which bond should she purchase? wh . (1) The vaue of bord A rthe regured return is 10%, ?s S» (Rond to thhe fearest cent ) (2) The value of bordAfthe required reumis 13%,6S» Fond to the nearest cent ) 0) The vauo of bond A fmeteared return is 16% s s» (Round to he nearest cert ) b. (1) The value of brd B. ns wared eun 10%" Rand tore nearest cert ) (2? The value of bond ?, itthe regied retum Elys.c«D (Round to the nearest cart ) (3) The value of bond B. f the requied neturn is 6%(Round to the nearest cent c. From your indings in parts a and b discuss the relationship bebween time to maturity and changing required retums the?Trosporave te man et vaue ofthe bord s tochanging reaarednetuns.and vice versa nould she purcnase? Why? (Seect the best anower beloux) seetonta dapdom mena ) The greater the length of tine to maturty interest rate ns d. I Lynh wanted to minimze i less She shouls purchase bond A becaute its moreepove 5o changes in interest rates tha chodd ourchase sond A because tsponsive to changes in interest ratesExplanation / Answer
Value of Bond A:
a.1. At 10%
Value = 1000 * 13% * PVAF(10%,6y) + 1000 * PVF(10%,6y)
Value = 130 * 4.355 + 1000 * 0.564 = 1130.66
a.2. At 13%
Value = 1000 * 13% * PVAF(13%,6y) + 1000 * PVF(13%,6y)
Value = 130 * 3.998 + 1000 * 0.480 = 1000.00
a.3. At 16%
Value = 1000 * 13% * PVAF(16%,6y) + 1000 * PVF(16%,6y)
Value = 130 * 3.685 + 1000 * 0.410 = 889.46
Value of Bond B:
b.1. At 10%
Value = 1000 * 13% * PVAF(10%,16y) + 1000 * PVF(10%,16y)
Value = 130 * 7.824 + 1000 * 0.218 = 1234.71
b.2. At 13%
Value = 1000 * 13% * PVAF(13%,16y) + 1000 * PVF(13%,16y)
Value = 130 * 6.604 + 1000 * 0.141= 1000.00
b.3. At 16%
Value = 1000 * 13% * PVAF(16%,16y) + 1000 * PVF(16%,16y)
Value = 130 * 5.668 + 1000 * 0.093= 829.95
c. With high time to maturity and lower Required rate, the bond with shorter time to maturity is higher and vice versa.
d. For minimising the interest rate risk, The boind with shorter time to maturity is purchased as the bond ingterest rate id less likely to fluctuate in shorter durations and these chances are high in case of bond with long time to maturity.
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