Question

(Bond valuation )Bellingham bonds have an annual coupon rate of 13 percent and a par value...

(Bond valuation )Bellingham bonds have an annual coupon rate of 13 percent and a par value of $1,000 and will mature in 2020 years. If you require a return of 11 percent, what price would you be willing to pay for the bond? What happens if you pay more for the bond? What happens if you pay less for the bond?

Answer showing work in excel function if possible

Homework Answers

Answer #1

The amount to be willing to pay for the bond is the Current Price of the Bond

Current Price of the Bond = Present Value of the Coupon payments + Present Value of Par Value

Par Value = $1,000

Annual Coupon Amount = $130 [$1,000 x 13%]

Yield to Maturity (YTM) = 11%

Maturity Years = 20 Years

Price of the Bond = Present Value of the Coupon payments + Present Value of Par Value

= $130[PVIFA 11%, 20 Years] + $1,000[PVIF 11%, 20 Years]

= [$130 x 7.96333] + [$1,000 x 0.12403]

= $1,035.24 + $124.03

= $1,159.27

“Therefore, the amount to be willing to pay for the bond = $1,159.27”

-If you pay more for the bond, the financial benefits from the Bond will be less and if you pay less for the Bond, the financial benefits from the Bond will be more.

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