You own a bond that pays $70 in annual interest, with a $1,000 par value. It matures
Question:
You own a bond that pays $70 in annual interest, with a $1,000 par value. It matures in 15 years. Your required rate of return is 7 percent.
a. Calculate the value of the bond.
b. How does the value change if your required rate of return (1) increases to 9percent or (2) decreases to 5 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 5 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.
Step by Step Answer:
BOND VALUATION DATA Years 15 Interest 70 70 Bond 1000 Required rate of return 70 AThe val...View the full answer
Foundations Of Finance
ISBN: 9780134083285
9th Edition
Authors: Arthur J. Keown, John H. Martin, J. William Petty
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
Students also viewed these Finance questions
-
You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. The markets required yield to maturity on a comparable-risk bond is 12 percent. a. Calculate the...
-
You own a bond that has a par value of $ 1,000 and matures in 5 years. It pays a 5 percent annual coupon rate. The bond currently sells for $ 1,100. What is the bonds expected rate of return?
-
Suppose that you own a bond that matures in one year, and promises to pay you $1,000 at that time. The current one-year interest rate in the economy is 6 percent. a. What is the price that someone...
-
Social welfare is maximized when O Total social benefits have been maximized O total social costs have been minimized O total social costs equal total social benefits O marginal social costs equal...
-
How can you use interest rate differentials to understand the probability of a devaluation and the potential magnitude of the devaluation?
-
Home Products Corporation, which sells a broad line of home detergent products, owns 75 percent of the stock of Level Brothers Soap Company. During 20X8, Level Brothers sold soap products to Home...
-
A Pepsi promotion encouraged consumers to collect Pepsi points and redeem them for merchandise. If they did not have quite enough points for the prize they wanted, they could buy additional points...
-
Sellmore.com uses the allowance method of accounting for bad debts. The company produced the following aging of the accounts receivable at year-end Instructions(a) Calculate the total estimated bad...
-
Listed below are eight firms that are currently operating in the market. The market share of each firm is listed in the table below. Firm Market Share Bird 16 Cat 11 Dog 8 Horse 4 Pig 5 Cow 10 Tiger...
-
On September 1, the balance of the Accounts Receivable control account in the general ledger of Johns Produce, Inc., was $11,960.The customers subsidiary ledger contained account balances as follows:...
-
Bellingham bonds have an annual coupon rate of 8 percent and a par value of $1,000 and will mature in 20 years. If you require a return of 7 percent, what price would you be willing to pay for the...
-
Kyser Public Utilities issued a bond with a $1,000 par value that pays $30 in annual interest. It matures in 20 years. Your required rate of return is 4 percent. a. Calculate the value of the bond....
-
Why are exit interviews important? Should an organization care about the opinions of people who are leaving? How are those opinions relevant to employee separation and retention?
-
Steven, age 40 is expected to earn $55,000 as a Financial Advisor. What will Steven's 2020 CPP contribution be? Show your calculation
-
Assume that the Modigliani-Miller assumptions hold and we have no taxes. Petro Inc. has no debt; its unlevered equity consists of 100,000 shares trading at $65 each. The unlevered equity has a beta...
-
What earning management for exchange difference on translation of foreign operation is $66,501,000 and -$113,160,000 in 2022 and 2023, and the difference is $46,659,000 taking a big bath ?
-
The Log-normal Distribution. In atmospheric science, the Log-normal distribution is often used to characterize particle size distributions. In one study, the distribution of silicone nanoparticle...
-
LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? Capital budget % Debt Net income (NI) $5,900 40%...
-
The code in Figure 8-24 should display the pattern of ampersands shown in the figure, but it is not working correctly. Debug the code. for (int row = 1; row < 4; row + 1) { for (int col = 1; col
-
6 (a) Briefly develop a mathematical model of the behaviour of a copper-twisted pair cable (b) Derive the magnetic energy from: w given that: K + w, where the - - k symbols have their usual meaning...
-
Explain what is meant by the statement The use of current liabilities as opposed to long-term debt subjects the firm to a greater risk of illiquidity.
-
Define the hedging principle. How can this principle be used in the management of working capital?
-
Define the following terms: a. Permanent asset investments b. Temporary asset investments c. Permanent sources of financing d. Temporary sources of financing e. Spontaneous sources of financing
-
Background Amity Holdings Pty Limited (Amity) is an Australian resident company that was incorporated during 2022. After purchasing several investments including real estate and shares, in 2023 Amity...
-
2) What is the rate of return in the following cash flow? -4816 +1000 +2000 +3000
-
3. Assume that the manufacturing of generic medicine XYZ is a perfectly competitive industry. Suppose that the annual demand for this medicine is given by: Q = 1,450 - 30P. There are exactly a...
Study smarter with the SolutionInn App