(1) What would be the value of the bond described in part d if, just after it...
Question:
(1) What would be the value of the bond described in part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond?
(2) What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond?
(3) What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
Step by Step Answer:
The bond described in part d is a 10year bond with a face value of 1000 and a coupon rate of 10 If t...View the full answer
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
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The present value of future cash flows is calculated to determine the value today of a stream of future cash flows. It is calculated by discounting the future cash flows to their present value using a discount rate. The discount rate reflects the time value of money and the risk of the cash flows. It is important because it helps in making investment decisions, capital budgeting, loan decision making, and financial planning. By discounting future cash flows to their present value using a discount rate, it takes into account the time value of money and the risk associated with the cash flows. This allows investors, lenders, and financial planners to evaluate the viability of potential investments, projects, or loan applications, and to estimate the future value of investments or savings. calculating the present value of future cash flows is important in making investment decisions, capital budgeting, loan decision making, and financial planning. It helps to determine the viability of long-term projects, evaluate loan applications, and estimate the future value of investments or savings.
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