Question

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 7% annual coupon. Bond L matures in 17 years, while Bond S matures in 1 year. Assume that only one more interest payment is to be made on Bond S at its maturity and that 17 more payments are to be made on Bond L.

What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent. $

What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent. $ What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent. $

What will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent.

$ What will the value of the Bond L be if the going interest rate is 13%? Round your answer to the nearest cent.

$ What will the value of the Bond S be if the going interest rate is 13%? Round your answer to the nearest cent. $

Answer 1

Bond L

Face value = 1000

Coupon rate = 7%

Coupon payment = 7% * 1000 = 70

Maturity = 17 years

Present value of Bond at 4% interest = 70*(P/A, 4%, 17) + 1000 *(P/F, 4%,17)

= 70*12.1656685 + 1000 *0.5133732 = 1364.97

Present value of Bond at 9% interest = 70*(P/A, 9%, 17) + 1000 *(P/F, 9%,17)

= 70*8.543631 + 1000 *0.2310731 = 829.13

Present value of Bond at 13% interest = 70*(P/A, 13%, 17) + 1000 *(P/F, 13%,17)

= 70*6.7290929+ 1000 *0.1252179 = 596.25

Bond S

Face value = 1000

Coupon rate = 7%

Coupon payment = 7% * 1000 = 70

Maturity = 1 years

Present value of Bond at 4% interest = (70+1000) *(P/F, 4%,1) = 1070 * 0.96153846 = 1028.85

Present value of Bond at 9% interest = (70+1000) *(P/F, 9%,1) = 1070 * 0.9174311 = 981.65

Present value of Bond at 13% interest = (70+1000) *(P/F, 13%,1) = 1070 * 0.88495575 = 946.90