Question

a,b,c,d,e

(Bond valuation) You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. Your required rate of return is 11 percent a. Calculate the value of the bond. b. How does the value change if your required rate of return (1) increases to 15 percent or (2) decreases to 7 percent? c. Explain the implications of your answers in part (b) as they relate to interest rate risk, premium bonds, and discount bonds. d. Assume that the bond matures in 4 years instead of 15 years. Recompute your answers in part (b). e. Explain the implications of your answers in part (d) as they relate to interest rate risk, premium bonds, and discount bonds. a. If your required rate of return is 11 percent, what is the value of the bond? S(Round to the nearest cent.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

- 2x Σ AutoSum : A Insert Delete Format Fill 2 Clear Sort & Filter Editing Find & Select Cells BOND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins * Cut Calibri -11AA = = = Dr Wrap Text General E Copy Paste B I U B- SF A Merge Merge & Center - Center Format Painter $ -% % 4:0 .00 . Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment Number Styles AU47 Box AQ AR Formula Bar AT AU AV AW AX 47 48 FV 1000 49 COUPON 100 50 LIFE 15 YTM 11% AY AZ BA BB 51 52 VALUE OF BOND $ 928.09 EXCEL =PV(AS51, AS50,-AS49,-AS48) IF YTM INCREASES TO VALUE OF BOND 15% $ 707.63 EXCEL=PV(AS55, AS50,-AS49,-AS48) 53 (a) 54 55 (b)(i) 56 57 58 (b)(ii) 59 60 61 (c) 62 63 IF YTM DECREASES TO VALUE OF BOND 7% $ 1,273.24 EXCEL = PV(AS58, AS50,-AS49,-AS48) WHEN THE YTM = 15% : BOND IS TRADING AT A DISCOUNT AS YTM > COUPON RATE. SO IT IS A DISCOUNT BOND WHEN THE YTM = 7%: BOND IS TRADING AT A PREMIUM AS YTM < COUPON RATE. SO IT IS A PREMIUM BOND 64 AS THE LIFE IS HIGHER, THE BONDS HAVE HIGHER INTEREST RATE RISK COMPARED TO LOWER MATURITY BONDS 65 ► Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARRANT refund S5 O YIELD SPOT ferences S4 BO S6 O 130% LI - Rea 0 . B 9 . * ENG 04-11-2019