Problem 7-5. Bond valuation An investor has two bonds in his portfolio that both

Question

Problem 7-5. Bond valuation

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 11% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year.

Assume that there is only one more interest payment to be made on Bond S, at its maturity, and 19 more payments on Bond L.

a. What will the value of the Bond L be if the going interest rate is 6%? Round your answer to two decimal places at the end of the calculations.

b. What will the value of the Bond S be if the going interest rate is 6%? Round your answer to two decimal places at the end of the calculations.

c. What will the value of the Bond L be if the going interest rate is 10%? Round your answer to two decimal places at the end of the calculations.

d. What will the value of the Bond S be if the going interest rate is 10%? Round your answer to two decimal places at the end of the calculations.

e. What will the value of the Bond L be if the going interest rate is 12%? Round your answer to two decimal places at the end of the calculations.

f. What will the value of the Bond S be if the going interest rate is 12%? Round your answer to two decimal places at the end of the calculations.

Explanation / Answer

Hi, If you like my answer rate me first...that way only I can earn points. Thanks a) Value = $80*(1-1.05^-18)/0.05 + 1000*1.05^-18 = $1350.69 b) Value = $80*1.05^-1 + 1000*1.05^-1 = $1028.57 c) Value = $80*(1-1.10^-18)/0.10 + 1000*1.10^-18 = $835.97 d) Value = $80*1.1^-1 + 1000*1.10^-1 = $981.82 e) Value = $80*(1-1.11^-18)/0.11 + 1000*1.11^-18 = $768.95 f) Value = $80*1.11^-1 + 1000*1.11^-1 = $972.97

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