week 6 8. Kamins Corporation has two bond issues outstanding, each with a par va
ID: 2665900 • Letter: W
Question
week 68. Kamins Corporation has two bond issues outstanding, each with
a par value of $1,000. Information about each follows. Suppose
market interest rates rise 1 percentage point across the yield curve.
What will be the change in price for each of the bonds? Does this tell
us anything about the relationship between time to maturity and
interest rate risk?
Bond A: 5 years to maturity, 8 percent coupon, 9 percent market interest rate
Bond B: 12 years to maturity, 8 percent coupon, 9 percent market interest rate
Explanation / Answer
Calculating the Present value of the bond-A using excel sheet: Annual coupon payment = $1000 * 8% = $80 Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 9%; Nper = 5; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $961" Therefore, the present value of the bond is $961 b) If the market interest rate increased by 1% then the new market interest rate is 10% Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 5; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $924" Therefore, the present value of the bond is $924 Decrease in the value of the bonds is $37 (3.85%) for 1% increase in the market interest rate. Calculating the present value of the Bond-B: Annual coupon payment = $1000 * 8% = $80 Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 9%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $928" Therefore, the present value of the bond is $928 b) If the market interest rate increased by 1% then the new market interest rate is 10% Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $863" Therefore, the present value of the bond is $863 Decrease in the value of the bonds is $65 (7%) for 1% increase in the market interest rate. 2) When interest rates rise, the bond prices fall; Conversely, when rate declines the bond price rise. The longer the time to a bond's maturity, the greater is its interest rate risk. Annual coupon payment = $1000 * 8% = $80 Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 9%; Nper = 5; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $961" Therefore, the present value of the bond is $961 b) If the market interest rate increased by 1% then the new market interest rate is 10% Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 5; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $924" Therefore, the present value of the bond is $924 Decrease in the value of the bonds is $37 (3.85%) for 1% increase in the market interest rate. Calculating the present value of the Bond-B: Annual coupon payment = $1000 * 8% = $80 Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 9%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $928" Therefore, the present value of the bond is $928 b) If the market interest rate increased by 1% then the new market interest rate is 10% Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $863" Therefore, the present value of the bond is $863 Decrease in the value of the bonds is $65 (7%) for 1% increase in the market interest rate. 2) When interest rates rise, the bond prices fall; Conversely, when rate declines the bond price rise. The longer the time to a bond's maturity, the greater is its interest rate risk. Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 5; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $924" Therefore, the present value of the bond is $924 Decrease in the value of the bonds is $37 (3.85%) for 1% increase in the market interest rate. Calculating the present value of the Bond-B: Annual coupon payment = $1000 * 8% = $80 Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 9%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $928" Therefore, the present value of the bond is $928 b) If the market interest rate increased by 1% then the new market interest rate is 10% Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $863" Therefore, the present value of the bond is $863 Decrease in the value of the bonds is $65 (7%) for 1% increase in the market interest rate. 2) When interest rates rise, the bond prices fall; Conversely, when rate declines the bond price rise. The longer the time to a bond's maturity, the greater is its interest rate risk. Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 5; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $924" Therefore, the present value of the bond is $924 Decrease in the value of the bonds is $37 (3.85%) for 1% increase in the market interest rate. Calculating the present value of the Bond-B: Annual coupon payment = $1000 * 8% = $80 Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 9%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $928" Therefore, the present value of the bond is $928 b) If the market interest rate increased by 1% then the new market interest rate is 10% Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $863" Therefore, the present value of the bond is $863 Decrease in the value of the bonds is $65 (7%) for 1% increase in the market interest rate. 2) When interest rates rise, the bond prices fall; Conversely, when rate declines the bond price rise. The longer the time to a bond's maturity, the greater is its interest rate risk. Annual coupon payment = $1000 * 8% = $80 Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 9%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $928" Therefore, the present value of the bond is $928 b) If the market interest rate increased by 1% then the new market interest rate is 10% Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $863" Therefore, the present value of the bond is $863 Decrease in the value of the bonds is $65 (7%) for 1% increase in the market interest rate. 2) When interest rates rise, the bond prices fall; Conversely, when rate declines the bond price rise. The longer the time to a bond's maturity, the greater is its interest rate risk. Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $863" Therefore, the present value of the bond is $863 Decrease in the value of the bonds is $65 (7%) for 1% increase in the market interest rate. 2) When interest rates rise, the bond prices fall; Conversely, when rate declines the bond price rise. The longer the time to a bond's maturity, the greater is its interest rate risk. Step1: Go to excel and click"insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 10%; Nper = 12; PMT = -80 ; FV = -1000 Step4: Click "OK" to get the desired value. The value come to " $863" Therefore, the present value of the bond is $863 Decrease in the value of the bonds is $65 (7%) for 1% increase in the market interest rate. 2) When interest rates rise, the bond prices fall; Conversely, when rate declines the bond price rise. The longer the time to a bond's maturity, the greater is its interest rate risk.Related Questions
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