Question

3M Corporation has outstanding an issue of $1000 face value, 8.5% coupon bonds that mature in...

3M Corporation has outstanding an issue of $1000 face value, 8.5% coupon bonds that mature in 15 years. Today, investors require a 14% rate of return.

a. Calculate the price of these bonds today.

b. Calculate the price of these bonds 5 years from now if market interests do not change.

c. Calculate the price of these bonds 5 years from now if investors’ required rate of return declines to 11%.

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Answer #1

Bond Par Value = $1,000

Coupon Rate = 8.5%

YTM = 14%

a.

Time Period = 15 years

Calculating Bond Value,

Using TVM Calculation,

PV = [FV = 1,000, PMT = 85, T = 15, I = 0.14]

PV = $662.18

b.

Time Period = 10 years

Calculating Bond Value,

Using TVM Calculation,

PV = [FV = 1,000, PMT = 85, T = 10, I = 0.14]

PV = $713.11

c.

Calculating Bond Value,

Using TVM Calculation,

PV = [FV = 1,000, PMT = 85, T = 10, I = 0.111]

PV = $852.77

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