Question

A bond you are evaluating has a 10 percent coupon rate (compounded semiannually), a $1,000 face value, and is 10 years from maturity. ( LG 3-4)

If the required rate of return on the bond is 6 percent, what is its fair present value?

If the required rate of return on the bond is 8 percent, what is its fair present value?

What do your answers to parts (a) and (b) say about the relation between required rates of return and fair values of bonds?

Answer 1

a)	Fair present value		=	=-pv(rate,nper,pmt,fv)
			=	$ 1,297.55
	Where,
	rate	3%
	nper	20
	pmt	$             50
	fv	$       1,000
b)	Fair present value		=	=-pv(rate,nper,pmt,fv)
			=	$ 1,135.90
	Where,
	rate	4%
	nper	20
	pmt	$             50
	fv	$       1,000
c)	On the basis of (a) and (b), it is observed that fair values of bonds and required rate of return has adverse relation.
	If required rate of return increases, fair present value decreases.