the nickelodeon manufacturing co. has a series of $1000 par value bonds outstand

Question

the nickelodeon manufacturing co. has a series of $1000 par value bonds outstanding.Each bond pays interest semi-annually and carries an annual coupon rate of 7%.some bonds are due in 3 years and others are due in 10 years. if the required rate of return on bonds is 10% what is the current price of theA)the bonds with 3 years to maturity B) bonds with 10 years maturity?please explain the relationship between the number of years until the bond matures and it pricee. Please show work so i will better understand.Thank you.

Explanation / Answer

We have Maturity = FV = 1000

Coupon = 7% Semi. SO PMT = 7%*1000/2 = 35

Rate = 10%/2 = 5%

For 3 yr bond: nper = 3*2 = 6 periods

So Present value = PV(Rate,nper,pmt,fv)

= PV(5%,6,35,1000)

= $923.86

For 10yr bond: nper = 10*2 = 20 periods

So Present value = PV(Rate,nper,pmt,fv)

= PV(5%,20,35,1000)

= $813.07

As no of year increase, the PV of money reduces & hence bodn price reduces

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