Question

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 6% annual coupon. Bond L matures in 10 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 10 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 8%? Round your answer to the nearest cent.

What will the value of the Bond S be if the going interest rate is 8%? Round your answer to the nearest cent.

What will the value of the Bond L be if the going interest rate is 14%? Round your answer to the nearest cent.

What will the value of the Bond S be if the going interest rate is 14%? Round your answer to the nearest cent.

Answer 1

Value of Bond is equal to the present value of all coupon payments and the principal amount

Value of Bond L = 60*PVAF(4%, 10 years) + 1,000*PVF(4%, 10 years)

= 60*8.111 + 1,000*0.676

= $1,162.66

Value of Bond S = 1,060*PVF(4%, 1 year)

= 1,060*0.962

= $1,019.72

value of the Bond L be if the going interest rate is 8% = 60*PVAF(8%, 10 years) + 1,000*PVF(8%, 10 years)
= 60*6.710 + 1,000*0.463

= $865.6

value of the Bond S be if the going interest rate is 8% = 1,060*PVF(8%,1 year)

= 1,060*0.926

= $981.56

value of the Bond L be if the going interest rate is 14% = 60*PVAF(14%, 10 years) + 1,000*PVF(14%, 10 years)

= 60*5.216 + 1,000*0.270

= $582.96

value of the Bond S be if the going interest rate is 14% = 1,060*PVF(14%, 1 year)

= 1,060*0.877

= $929.62