Question

1, You own a bond that pays $60 in annual interest, with a $1,000 par value. It matures in 20 years. Your required rate of return is 6 percent.

a, Value of bond = ??

b, If you required rate of return increases to 10%, what is the value of bond?

c, If you required rate of return decreases to 4% , what is the value of bond?

d, Assume that the bond matures in 3 years instead of 20 years. If the bond required rate of return is 6 percent, bond value=

( If you required rate of return increases to 10%, the bond value = ?)

( If your required rate of return decreases to 4% , the bond value = ??

d,part 2: If you required rate of return increases to 10%, what is the value of bond?

2, You buy the newly issued bond at par value with coupon rate at 6%. One year later, the required rate of return increases to 10%, and you decide to sell the bond,

a, How much are you supposed to sell for 3 years bond?

b, How much are you supposed to sell for 20 years bond?

Answer 1

Given annual interest =$60, Par Value=$1000, Maturity=20 years, required rate of return=6%

Formula for value of Bond= Present value of interest for n years+ Present value of Par Value at Nth Year

a) Value of Bond =1000

Since Coupon rate (Interest rate)=Required rate of return

b) if required rate of return =10%

Value of Bond= 60*PVAF(10%,20)+1000*PVF(10%,20)

=60*8.514+1000*.149

=$659.84

c) if required rate of return=4%

Value of Bond=60*PVAF(4%,20)+1000*PVF(4%,20)

= 60*13.590+ 1000*.456

=$1271.4

d) if maturity year chages from 20 year to 3 year and required rate of ruturn id 6%. Since Coupon interest 60 ie 6% is equal to required rate of return 6%. ie value of Bond =Par value of Bond=$1000

another sub parts can be answered according to above formula.