.Assume a $1,000 face value bond has a coupon rate of 8.5 percent paid semiannua

Question

.Assume a $1,000 face value bond has a coupon rate of 8.5 percent paid semiannually and has an eight-year life. If investors are willing to accept a 10.25 percent rate of return on bonds of similar quality, what is the present value or worth of this bond? a) by how much would the value of the bond in the problem change if investors wanted an 8%rate of return? B) a bond with the same par value and coupon rate as the bond in the problem 14 years until maturity . if investors will use a 10.25 percent discount rate to value this bond , by how much should its price differ from the bond in the problem?

Explanation / Answer

Small Calculation mistakes in the above solution Since these are semi annual bonds we need to take i an if in terms of Half year i = 10.25/2/100 = 0.05125 if = 8.5/2/100 = 0.0425 C = if * F = 0.0425 * 1000 = 42.5 N = 8 * 2 = 16 Present value = 42.5 ( 1 - (1 + 0.05125)^-16)/0.05125 + 1000 * ( 1 + 0.05125)^-16 = $ 906. (a) When rate of return is 8 % i = 8/2/100 = 0.04 Present value = 42.5 ( 1 - (1 + 0.04)^-16)/0.04 + 1000 * ( 1 + 0.04)^-16 = $ 1029.13 (b) Here N = 14 * 2 = 28 Rest is same as first part Present value = 42.5 ( 1 - (1 + 0.05125)^-28)/0.05125 + 1000 * ( 1 + 0.05125)^-28 = $ 871.39

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

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