Question

20- The XYZ Company's bonds have a face value of $1.000, will mature in ten years, and carry a coupon rate of 12 percent. Assume interest payments are made semi-annually. a. Determine the present value of the bond's price if the required rate of return is 12 percent. b. How would your answer change if the required rate of return is 10 percent? c. How would your answer change if the required return is 16 percent?

Answer 1

Answer: those Semiannual Interest Bonds are bonds which pay interest annually To valute such Bonds, we have make 3 changes : to Annual Interest Amount = 2 - 61 Yield pa - 12 - 2 years to maturity x 2 = 10 x 2-20 years ③ 1 (a) Value of Bond - Interest & Int . Int + +yidt) Inil + (i+yield)? it yield)

) Yolant n 777777777777777 a ostro 3700 -760 x 11.4699) +lovo X:3118) -688.2 + 311.8 The present volue as the face value rate is same of the bond is same blecause the coupon as the required rate b) If the required rate of return is 10% the value of the bond will increase becalise the required rate of return 4 the price of bond have invente inverse relationship If the required rate of return is 161 the rate of the bond will decrease because that required rate of return & the price of the bond have inverse relationship c)