An investor has two bonds in his portfolio that have a face value of $1,000 and

Question

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 6% annual coupon. Bond L matures in 16 years, while Bond S matures in 1 year.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 16 more payments are to be made on Bond L.

a. What will the value of the Bond L be if the going interest rate is 6%? Round your answer to the nearest cent.

b. What will the value of the Bond S be if the going interest rate is 6%? Round your answer to the nearest cent.

c. What will the value of the Bond L be if the going interest rate is 8%? Round your answer to the nearest cent.

d. What will the value of the Bond S be if the going interest rate is 8%? Round your answer to the nearest cent.

e. What will the value of the Bond L be if the going interest rate is 13%? Round your answer to the nearest cent.

f. What will the value of the Bond S be if the going interest rate is 13%? Round your answer to the nearest cent.

Explanation / Answer

Bond L Bond S Face Value (FV) $1000 $1000 Annual Coupan Rate 6% 6% Maturity Term 16 years 1 years Coupan Amount (1000*6%) (1000*6%) Coupan Amount per year 60 60 a) Value of Bond L if interest rate is 6% By using PV Function in excel Value of Bond $1000 PV(6%,16,60,1000) b) Value of Bond S if interest rate is 6% By using PV Function in excel Value of Bond $1000 PV(6%,1,60,1000) c) Value of Bond L if interest rate is 8 % By using PV Function in excel Value of Bond $822.97 PV(8%,16,60,1000) d) Value of Bond S if interest rate is 8% By using PV Function in excel Value of Bond $981.48 PV(8%,1,60,1000) e) Value of Bond L if interest rate is 13 % By using PV Function in excel Value of Bond $537.73 PV(13%,16,60,1000) f) Value of Bond S if interest rate is 13% By using PV Function in excel Value of Bond $938.05 PV(13%,1,60,1000)

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