Pecos Manufacturing has just issued a 15-year, 9% coupon interest rate, $1000-pa

Question

Pecos Manufacturing has just issued a 15-year, 9% coupon interest rate, $1000-par bond that pays interest annually.The required return is currently 13%, and the company is certain it will remain at 13% until the bond matures in 15 years.

a.Assuming that the required return does remain at 13% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity.

(1) The value of the bond with15 years to maturity is $

(2) The value of the bond with 12 years to maturity is $

(3) The value of the bond with 9 years to maturity is $

(4) The value of the bond with 6 years to maturity is $

(5) The value of the bond with 3 years to maturity is $

(6) The value of the bond with 1 year to maturity is $

Explanation / Answer

Value of bond = C/(1+i) + C/(1+i)^2 + ….. + C/(1+i)^n + F/(1+i)^n

C = amount of coupon payment

i = required yield

n = number of coupon payments or term

F = Face Value of bond or Maturity Value

Or Value of Bond = C * ((1-(1+r)^(-n))/r) + F/(1+i)^n (using the formula for Present Value of an annuity where r is effective rate of interest per time period, n is number of time periods)

C = 9% * 1000 = $90

r = 13%

F = $1000

For n = 15 years

Value of Bond = 90*((1-(1+13%)^(-15))/13%) + 1000/(1+13%)^15 = $741.50

For n = 12 years

Value of Bond = 90*((1-(1+13%)^(-12))/13%) + 1000/(1+13%)^12 = $763.29

For n = 9 years

Value of Bond = 90*((1-(1+13%)^(-9))/13%) + 1000/(1+13%)^9 = $794.73

For n = 6 years

Value of Bond = 90*((1-(1+13%)^(-6))/13%) + 1000/(1+13%)^6 = $840.10

For n = 3 years

Value of Bond = 90*((1-(1+13%)^(-3))/13%) + 1000/(1+13%)^3 = $905.55

For n = 1 years

Value of Bond = 90*((1-(1+13%)^(-1))/13%) + 1000/(1+13%)^1 = $964.60  

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