1. Bond. What is the value of a $1,000 par value bond with annual payments of an
ID: 2662733 • Letter: 1
Question
1. Bond. What is the value of a $1,000 par value bond with annual payments of ana. 11% coupon with a maturity of 20 years and a 15% required return?
b. 12% coupon with a maturity of 10 years and a 7% required return?
c. 8% semiannual coupon with a maturity of 10 years and a 11% required return?
d. 8% semiannual coupon with a maturity of 20 years and a 6% required return?
2. Bond. What is the yield to maturity of a $1000 par value bond with an
a. 10% semiannual coupon and 20 years to maturity and a $1,000 price?
b. 6.5% semiannual coupon and 13 years to maturity and a $890 price?
c. 7.5% annual coupon and 19 years to maturity and a $788 price?
d. 4.5% annual coupon and 7 years to maturity and a $800 price?
Explanation / Answer
Fair Value of a Bond To value a bond, we begin with our principle of finance called the Valuation Principle: The fair value of an asset is the present value of the asset's future cash flows. That is, the fair price is equal to the Sum of [ Cash flows * present value factor (PVF) ] A bond has two types of cash flows: interest payments and return of the principle (or par value). Therefore, the value of a bond is: Sum of [ Interest payments * PVF + Par Value * PVF ] Virtually all bonds pay interest semi-annually. So it is necessary to express everything in semi-annual terms. We must convert years into semi-periods (e.g., 5 years is the same as 10 semi-annual periods). We must also convert annual rates of interest into semi-annual rates (e.g., 8% annual interest is the same as 4% semi-annual interest).
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