Question

(Bond valuation​) You own a bond that pays $120 in annual​ interest, with a ​$1,000 par value. It matures in 15 years. Your required rate of return is 10 percent.

a. Calculate the value of the bond.

b. How does the value change if your required rate of return​ (1) increases to 16 percent or​ (2) decreases to 6 ​percent?

c. Explain the implications of your answers in part ​(b​) as they relate to interest rate​ risk, premium​ bonds, and discount bonds.

d. Assume that the bond matures in 4 years instead of 15 years. Recompute your answers in part ​(b​).

e. Explain the implications of your answers in part ​(d​) as they relate to interest rate​ risk, premium​ bonds, and discount bonds.

___________________________________________________________________________________________________________________________

a. If your required rate of return is 10 ​percent, what is the value of the​ bond? ___ ​(Round to the nearest​ cent.)

b. What is the value of the bond if your required rate of return increases to 16 ​percent? ​___ (Round to the nearest​ cent.)

What is the value of the bond if your required rate of return decreases to 6 ​percent? ___  ​(Round to the nearest​ cent.)

c. Based on the answers in part ​(b​), a decrease in interest rates​ (the required rate of​ return) will cause the value of a bond to (increase/decrease)​;by​ contrast, an increase in interest rates will cause the value to (increase/decrease). ​(Select from the​ drop-down menus.)

Also, based on the answers in part ​(b​), if the required rate of return​ (current interest​ rate):​(Select from the​ drop-down menus.)

1. Equals the coupon interest​ rate, the bond will sell at (par/discount/premium).

2. Exceeds the​ bond's coupon​ rate, the bond will sell at a (par/discount/premium).

3. Is less than the​ bond's coupon​ rate, the bond will sell at a (par/discount/premium).

d. Assume the bond matures in 4 years instead of 15 years.

What is the value of the bond if your required rate of return is 10 ​percent? ___ (Round to the nearest​ cent.)

What is the value of the bond if your required rate of return increases to 16 ​percent? ___ ​(Round to the nearest​ cent.)

What is the value of the bond if your required rate of return decreases to 6 ​percent? ___ ​(Round to the nearest​ cent.)

e. From the findings in part ​(d​), we can conclude that a bondholder owning a​ long-term bond is exposed to (greater/same) interest rate risk than one owning a​ short-term bond. ​(Select from the​ drop-down menu.)

Answer 1

As per rules I am answering the first 4 sub parts of the question.

1: Using financial calculator: Input I/Y = 10

N = 15

PMT = 120

FV= 1000

Solve for PV as -1152.12

Value of the bond = $ 1152.12

2:

Using financial calculator: Input I/Y = 16

N = 15

PMT = 120

FV= 1000

Solve for PV as - 776.98

Value of bond = $776.98

3: Using financial calculator: Input I/Y = 6

N = 15

PMT = 120

FV= 1000

Solve for PV as -1582.73

Value of the bond = $1582.73

4: Increase, Decrease

Decline in rate will increase the price since the bond paying higher coupon becomes more attractive and vice versa.