Question

Problem 5-09 Bond Valuation and Interest Rate Risk The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year. What will be the value of each of these bonds when the going rate of interest is 4%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

What will be the value of each of these bonds when the going rate of interest is 9%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

What will be the value of each of these bonds when the going rate of interest is 11%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

Answer 1

Price of a bond is mathematically calculated using the following expression:

P is price of bond with periodic coupon C, periodic YTM i, n periods to maturity and M face value.

a) i = 4%

For Bond L,

P(L) = $1,111.84 + $555.26

P(L) = $1,667.10

For Bond S,

P(S) = $96.15 + $961.54

P(S) = $1,057.69

b) i = 9%

For Bond L,

P(L) = $806.07 + $274.54

P(L) = $1,080.61

For Bond S,

P(S) = $91.74 + $917.43

P(S) = $1,009.17

3) i = 11%

For Bond L,

P(L) = $719.09 + $209.00

P(L) = $928.09

For Bond S,

P(S) = $90.09 + $900.90

P(S) = $990.99