Question

BOND VALUATION

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 17 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 17 more payments are to be made on Bond L.

1. 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

Par Value = 1000
Coupon = 6%*1000 = 60

a) Bond Price of L at 4% = PV of coupons + PV of Par value = 60*(1-(1+4%)^-17)/4% + 1000/(1+4%)¹⁷ = 1243.31

b) Bond Price of S at 4% = PV of coupons + PV of Par value = 60*(1-(1+4%)^-1)/4% + 1000/(1+4%)¹ = 1019.23

c) Bond Price of L at 8% = PV of coupons + PV of Par value = 60*(1-(1+8%)^-17)/8% + 1000/(1+8%)¹⁷ = 817.57

d) Bond Price of S at 8% = PV of coupons + PV of Par value = 60*(1-(1+8%)^-1)/8% + 1000/(1+8%)¹ = 981.48

e) Bond Price of L at 14% = PV of coupons + PV of Par value = 60*(1-(1+14%)^-17)/14% + 1000/(1+14%)¹⁷ = 490.17

f)  Bond Price of S at 14% = PV of coupons + PV of Par value = 60*(1-(1+14%)^-1)/14% + 1000/(1+14%)¹ = 929.82

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