New generation public utilities issued a bond with a $1,000 par value the pays $

Question

New generation public utilities issued a bond with a $1,000 par value the pays $80 in annual interest. It matures in 20 years. your required rate of return is 7 percent.

A. calculate the the value of the bound?

B. how does the value change if your required rate of return (1) increases to 10 percent or (2) decreases to 6%?

C. explain the implications of your answers in part b as they relate to interest rate risk, premium bonds, and discount bonds?

d. Assume that the bond matures in 10 years instead of 20 years. recompute your answers in part b?

e. explain the implications of your answers in part d as they relate to interest rate risk, premium bond, and discount bounds?

Explanation / Answer

a) Calculating the value of the bond using excel sheet: 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 Step3: Enter the values as Rate = 7%; Nper = 20; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$1,106" b) If the required return changes to 10% then the present value of the bond is calculated as 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 Step3: Enter the values as Rate = 10%; Nper = 20; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$830" If the required return changes to 6% then the present value of the bond is calculated as 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 Step3: Enter the values as Rate = 6%; Nper = 20; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$1,229.40" c) Technically, the bond price and the yield are inversely related. When the yield goes up, the price comes down and when the yield comes down the price goes up. When the yield increases, the bond is issued at a discount and when the yield decreases, the bond is issued at a premium. d) If the bond matures in 10yrs instead of 20yrs, then the present value of the bond is calculated as: 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 Step3: Enter the values as Rate = 10%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$877" If the required return changes to 6% then the present value of the bond is calculated as 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 Step3: Enter the values as Rate = 6%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$1,147" e) When the maturity years changes from 20yrs to 10yrs and the required return increases from 7% to 10%, the bond price came to $877. Therefore, there is an inverse relation between the years to maturity and the current price of the bond. When the maturity years changes from 20yrs to 10yrs and the required return decreases from 7% to 6%, the bond price came to $1,147. This indicates that there is an inverse relation between the years to maturity and the current price of the bond which means that as the maturity years reduces, the bond price increases. 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 Step3: Enter the values as Rate = 10%; Nper = 20; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$830" If the required return changes to 6% then the present value of the bond is calculated as 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 Step3: Enter the values as Rate = 6%; Nper = 20; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$1,229.40" c) Technically, the bond price and the yield are inversely related. When the yield goes up, the price comes down and when the yield comes down the price goes up. When the yield increases, the bond is issued at a discount and when the yield decreases, the bond is issued at a premium. d) If the bond matures in 10yrs instead of 20yrs, then the present value of the bond is calculated as: 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 Step3: Enter the values as Rate = 10%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$877" If the required return changes to 6% then the present value of the bond is calculated as 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 Step3: Enter the values as Rate = 6%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$1,147" e) When the maturity years changes from 20yrs to 10yrs and the required return increases from 7% to 10%, the bond price came to $877. Therefore, there is an inverse relation between the years to maturity and the current price of the bond. When the maturity years changes from 20yrs to 10yrs and the required return decreases from 7% to 6%, the bond price came to $1,147. This indicates that there is an inverse relation between the years to maturity and the current price of the bond which means that as the maturity years reduces, the bond price increases. 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 Step3: Enter the values as Rate = 6%; Nper = 20; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$1,229.40" c) Technically, the bond price and the yield are inversely related. When the yield goes up, the price comes down and when the yield comes down the price goes up. When the yield increases, the bond is issued at a discount and when the yield decreases, the bond is issued at a premium. d) If the bond matures in 10yrs instead of 20yrs, then the present value of the bond is calculated as: 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 Step3: Enter the values as Rate = 10%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$877" If the required return changes to 6% then the present value of the bond is calculated as 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 Step3: Enter the values as Rate = 6%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$1,147" e) When the maturity years changes from 20yrs to 10yrs and the required return increases from 7% to 10%, the bond price came to $877. Therefore, there is an inverse relation between the years to maturity and the current price of the bond. When the maturity years changes from 20yrs to 10yrs and the required return decreases from 7% to 6%, the bond price came to $1,147. This indicates that there is an inverse relation between the years to maturity and the current price of the bond which means that as the maturity years reduces, the bond price increases. 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 Step3: Enter the values as Rate = 6%; Nper = 20; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$1,229.40" c) Technically, the bond price and the yield are inversely related. When the yield goes up, the price comes down and when the yield comes down the price goes up. When the yield increases, the bond is issued at a discount and when the yield decreases, the bond is issued at a premium. d) If the bond matures in 10yrs instead of 20yrs, then the present value of the bond is calculated as: 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 Step3: Enter the values as Rate = 10%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$877" If the required return changes to 6% then the present value of the bond is calculated as 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 Step3: Enter the values as Rate = 6%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. 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 Step3: Enter the values as Rate = 10%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$877" If the required return changes to 6% then the present value of the bond is calculated as 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 Step3: Enter the values as Rate = 6%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. 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 Step3: Enter the values as Rate = 6%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. 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 Step3: Enter the values as Rate = 6%; Nper = 10; PMT = -80; FV = -1000 Step4: Click "OK" to get the desired value. The present value comes to "$1,147" e) When the maturity years changes from 20yrs to 10yrs and the required return increases from 7% to 10%, the bond price came to $877. Therefore, there is an inverse relation between the years to maturity and the current price of the bond. When the maturity years changes from 20yrs to 10yrs and the required return decreases from 7% to 6%, the bond price came to $1,147. This indicates that there is an inverse relation between the years to maturity and the current price of the bond which means that as the maturity years reduces, the bond price increases.

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

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