please show word so i can learn The desreumaux Company has two bond issues outst
ID: 2683280 • Letter: P
Question
please show word so i can learnThe desreumaux Company has two bond issues outstanding. Both bonds pay $100 annual interest
plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year. interest is paid annually
a. what will be the value of each of these bonds when the going rate of interest is 5%, 7% and 11%? Assume there is only one more interest payment to be made on bond S
b. why does the longer term 15 year bond fluctuate more when interest rates change thand does the shorter 1 year bond
Explanation / Answer
Bond L : We have Face Value =FV = 1000 PMT = 100 annual. So Coupon = PMT/FV = 10% Yr to maturity = 15. So nper = 15 When Int is 5%, Bond price =PV(Rate,nper,PMT,FV) = PV(5%,15,100,1000) = $1,519 When Int is 7%, Bond price =PV(Rate,nper,PMT,FV) = PV(7%,15,100,1000) = $1,273 When Int is 11%, Bond price =PV(Rate,nper,PMT,FV) = PV(11%,15,100,1000) = $928 Bond S: We have Face Value =FV = 1000 PMT = 100 annual. So Coupon = PMT/FV = 10% Yr to maturity = 1. So nper = 1 When Int is 5%, Bond price =PV(Rate,nper,PMT,FV) = PV(5%,1,100,1000) = $1,048 When Int is 7%, Bond price =PV(Rate,nper,PMT,FV) = PV(7%,1,100,1000) = $1,028 When Int is 11%, Bond price =PV(Rate,nper,PMT,FV) = PV(11%,1,100,1000) = $991 longer term bond fluctuates more because in the longer term market conditions changes dramatically....in the long term their face value may either increase or decrease due to increase in interest rates. The longer the time to maturity for a bond, the greater the risk that the issuing company will experience financial trouble. It occasionally may be difficult to sell a long-maturity bond because investors may be unwilling to lock in their money at low rates for long maturities during low interest rate periods
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.