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You buy a 6 percent, 20-year, $1,000 par value floating rate bond in 1999. By the year 2014, rates on bonds of similar risk a

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Answer #1

value of the bond = [present value of annuity factor * interest amount] + [present value factor * face value]

here,

present value of annuity factor = [1-(1+r)^(-n)]/r

r = 8%

n=5 years (from 2014 to 2019).

=>[1-(1.08)^(-5)] / 0.08

=>0.3194168/0.08

=>3.99271.

interest amount = 1000*6%

=>$60.

present value factor = 1/(1+r)^n

=>1/(1.08)^5

=>0.6805832.

face value =1000

value of the bond =[3.99271*60]+[1000*0.6805832]

=>239.5626+680.5832

=>920.15.

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