(Bond valuation relationships) A bond of Telink Corporation pays $100 in annual
ID: 2759201 • Letter: #
Question
(Bond valuation relationships) A bond of Telink Corporation pays $100 in annual interest, with a $1,000 par value. The bonds mature in 15 years. The market's required yield to maturity on a comparable-risk bond is 8 percent.
a. Calculate the value of the bond.
b. How does the value change if the market's required yield to maturity on a comparable-risk bond (i) increases to 13 percent or (ii) decreases to 4 percent?
c. Interpret your findings in parts a and b
a. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond is 88 percent?
$ nothing (Round to the nearest cent.)
b. (i) What is the value of the bond if the market's required yield to maturity on a comparable risk bond increases to 13 percent?
$ nothing (Round to the nearest cent.)
b. (ii) What is the value of the bond if the market's required yield to maturity on a comparable risk bond decreases to 4 percent?
$ nothing (Round to the nearest cent.)
c. The change in the value of a bond caused by changing interest rates is called interest-rate risk. Based on the answers in part b, a decrease in interest rates (the yield to maturity) will cause the value of a bond (increase, decrease or remain unchanged); by contrast, an increase interest rates will cause the value to (increase, decrease and remain unchanged).
Explanation / Answer
(1)
(a) Value of bond = Sum of present value (PV) of all future income fom bond = PV of coupon + PV of redemption value
Value ($) = 100 x PVIFA(8%, 15) + 1,000 x PVIF(8%, 15)
= 100 x 8.5595 [From PVIFA table] + 1,000 x 0.3152 [From PVIF table]
= 855.95 + 315.24
= 1,171.19
(b)
(i) Yield = 13%
Value ($) = 100 x PVIFA(13%, 15) + 1,000 x PVIF(13%, 15)
= 100 x 6.4624 [From PVIFA table] + 1,000 x 0.1599 [From PVIF table]
= 646.24 + 159.9
= 806.14
(ii) Yield = 4%
Value ($) = 100 x PVIFA(4%, 15) + 1,000 x PVIF(4%, 15)
= 100 x 11.1184 [From PVIFA table] + 1,000 x 0.5553 [From PVIF table]
= 1,111.84 + 555.3
= 1,667.14
(c) The relationship we observe is that, as required yield increases (decreases), bond price decreases (increases).
(d) Yield = 88%
Value ($) = 100 x PVIFA(88%, 15) + 1,000 x PVIF(88%, 15)
= 100 x 1.1363 [From PVIFA table] + 1,000 x 0.00008 [From PVIF table]
= 113.63 + 0.08
= 113.71
NOTE: First 4 sub-parts are answered.
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