A. Calculate the present value of bond A if the required rate of return is 6% ,
ID: 2759670 • Letter: A
Question
A. Calculate the present value of bond A if the required rate of return is 6% , 9% and 12% B. Calculate the present value of bond B of the required rate of return is 6% 9% and 12%Overv PS-19 (similar to) Bond value and time Changing required returns Personal Finance Probiem Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have SI imerest rates and pay aneual interest. Bond A has exactly S years to matunity, and boed B has 15 years to maburity. a, Calculate the present value ofbed A ifthe required fate ofream is: (1)65, (2)9% and (3) 12% b. Calculate the present value of bond B if the Prom yeur fndings in parts a and b, discuss the relationship beween time to maturity and changing required retums ang ng required returns Per al Finance P blem Lynn Pa ses ise id ng investing in either of two ding bonds. The bonds bod have $1,000 par values and 9% coupon required rate of return is: (i)6% (2) 9% and (3)12%. d. IfLyn wanted to miniine interest nate risk, which bond should she purchase? Why 1) The vakue of bond A, f the required returm i %sRound to the nearest cent) a. (1) The vabe of bend A, ifthe required retniseks4)CReundtothe nearest valae ofbond A, ifthe required retum .s0%is (Round to the nearest cent)
Explanation / Answer
Fv is 1000
C is 90 (9%*1000)
t for bond A is 5years and 15years for bond B
Pv of a bond =C[(1-(1+r)^-t)/r]+FV(1+r)^-t
When r is 6%;
Pv of a bond A =90[(1-(1+.06)^-5)/.06]+1000(1+.06)^-5
=90(4.2124)+1000(.74726)
=379.11+747.26
=$1126.37
Pv of a bond B=
90[(1-(1+.06)^-15)/.06]+1000(1+.06)^-15
=90(9.7123)+1000(.41727)
=874.10+417.27
=$1291.37
When r is 9%;
Pv of a bond A =90[(1-(1+.09)^-5)/.09]+1000(1+.09)^-5
=90(3.8897)+1000(649.93)
=350.07+649.93
=1000
Pv of a bond B=
90[(1-(1+.09)^-15)/.09]+1000(1+.09)^-15
=90(8.0607)+1000(.27454)
=725.46+274.54
=1000
When r is 12%
Pv of a bond A =90[(1-(1+.12)^-5)/.12]+1000(1+.12)^-5
=90(3.6048)+1000(.56743)
=324.43+567.43
=$891.86
Pv of a bond B=
90[(1-(1+.12)^-15)/.12]+1000(1+.12)^-15
=90(6.8109)+1000(.18270)
=612.98+182.70
=$795.68
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