1) Swanson Inc bonds have a 12% coupon rate with semi-annual coupon payments. they have 22 years to maturity and a par value of $1,000.
a) Compute the value of Swanson bonds if your required rate of return is 10%.
b) Suppose you decide to buy the bond, and immediately afterwards interest rates drop to 9.5%. How much value has the bond gained or lost?
a.
If required rate of return is 10% then price of bond is calculated in excel and screen shot provided below:
If required rate of return is 10% then price of bond is $1,176.63.
b.
You purchased bond at $1,176.63.
If rate of return drop to 9.50% then New price of bond is calculated in excel and screen shot provided below:
If rate of return drop to 9.50% then New price of bond is $1,229.
Capital Gain = $1,229 - $1,176.63
= $52.37.
Capital gain is $52.37.
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