PLEASE SHOW EXCEL WORK The Garraty Company has two bond issues outstanding. Both

Question

PLEASE SHOW EXCEL WORK The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year. A. what will be the value of each of these bonds when the going rate of interest is (1) 5% (2) 8% and (3) 12%? Assume that 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 than does the shorter-term bond (1 year)? "

Explanation / Answer

Bond L Par Value 1000 Annual Coupon 100 Time to maturity 15 years Calculation of value of the bond if discount rate is r% Value of the bond = Annual Coupon * ((1-(1/(1+r)^15))/r) + Parvalue / (1+r)^ Discount rate 5% 8% 12% (1+r)^15 2.078928179 3.172169114 5.473565759 PVF= 1/((1+r)^15 0.481017098 0.315241705 0.182696261 PVFA =(1-(1/(1+r)^15)/r 10.37965804 8.559478688 6.810864489 Coupon * PVFA 1037.965804 855.9478688 681.0864489 =b5*b16 Par Value * PVF 481.0170981 315.241705 182.6962613 = b4 * b14 Value of the bond 1518.98 1171.19 863.78 =b16+b17 Bond S Time to maturity 1 year Calculation of value of the bond if discount rate is r% Value of the bond = Annual Coupon * ((1-(1/(1+r)^15))/r) + Parvalue / (1+r)^ Discount rate 5% 8% 12% (1+r)^1 1.05 1.08 1.12 PVF= 1/((1+r)^1 0.952380952 0.925925926 0.892857143 (1-(1/(1+r)^1) 0.047619048 0.074074074 0.107142857 PVFA =(1-(1/(1+r)^1)/r 0.952380952 0.925925926 0.892857143 Coupon * PVFA 95.23809524 92.59259259 89.28571429 =b5*b35 Par Value * PVF 952.3809524 925.9259259 892.8571429 = b4 * b33 Value of the bond 1047.62 1018.52 982.14 =b36+b77 The long term bonds will fluctuate more due to the involvement of more discounting periods

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