You own a bond that pays $70 in annual interest, with a $1,000 par value. It matures
Question:
You own a bond that pays $70 in annual interest, with a $1,000 par value. It matures in 15 years. Your required rate of return is 7 percent.
a. Calculate the value of the bond.
b. How does the value change if your required rate of return (1) increases to 9percent or (2) decreases to 5 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 5 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.
Step by Step Answer:
BOND VALUATION DATA Years 15 Interest 70 70 Bond 1000 Required rate of return 70 AThe val...View the full answer
Foundations Of Finance
ISBN: 9780134083285
9th Edition
Authors: Arthur J. Keown, John H. Martin, J. William Petty
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
Students also viewed these Finance questions
-
You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. The markets required yield to maturity on a comparable-risk bond is 12 percent. a. Calculate the...
-
You own a bond that has a par value of $ 1,000 and matures in 5 years. It pays a 5 percent annual coupon rate. The bond currently sells for $ 1,100. What is the bonds expected rate of return?
-
Suppose that you own a bond that matures in one year, and promises to pay you $1,000 at that time. The current one-year interest rate in the economy is 6 percent. a. What is the price that someone...
-
Social welfare is maximized when O Total social benefits have been maximized O total social costs have been minimized O total social costs equal total social benefits O marginal social costs equal...
-
How can you use interest rate differentials to understand the probability of a devaluation and the potential magnitude of the devaluation?
-
Polyethylene bottles are used to contain fluids as various as milk and engine oil. A typical polyethylene bottle weighs about 30 grams and has a wall thickness of about \(0.8 \mathrm{~mm}\). The...
-
Of the 49 topics listed by a group of educators, what five topics are more important?
-
The ledger of Aiden Durant and Jasmine Adkins, attorneys-at-law, contains the following accounts and balances after adjustments have been recorded on December 31, 2012: The balance in Adkins' capital...
-
According to a disease control center, 29% of people in a certain country have high blood pressure. If a person in this country is selected at random, determine the odds in favor of this person...
-
1. Retrieve the file CFM0514P.XLS. 2. Enter the appropriate financial function command in cell B7 that solves Problem 14 in Chapter 5. This is the annual capital recovery payment for a 10-year...
-
Bellingham bonds have an annual coupon rate of 8 percent and a par value of $1,000 and will mature in 20 years. If you require a return of 7 percent, what price would you be willing to pay for the...
-
Kyser Public Utilities issued a bond with a $1,000 par value that pays $30 in annual interest. It matures in 20 years. Your required rate of return is 4 percent. a. Calculate the value of the bond....
-
Graph each logarithmic function. g(x) = log5 x
-
Since the Drug-Free Workplace Act of 1988 many U.S. employers have chosen to conduct drug testing as a pre-employment requirement, random testing of current employees, or a required test after a...
-
A gear pump has a 80 mm outside diameter, a 55 mm diameter, and a 25 mm width. If the actual pump flow rate at 2300 rpm and rated pressure is 140 LPM, calculate the Volumetric efficiency.
-
McGarr owned a property called Belgrave Square. McGarr sold Belgrave Square to Ward by a general warranty deed. Ward recorded his deed. The following year, on February 1, Ward sold Belgrave Square to...
-
Miller Companys contribution format income statement for the most recent month is shown below: Total Per Unit Sales (43,000 units) $ 344,000 $ 8.00 Variable expenses 215,000 5.00 Contribution margin...
-
A piezoresistive sensor has a measurement error of 1 mV. During the measurement the temperature fluctuation and its self-heating cause additional measurement errors of 0.2 mV and 0.05 mV...
-
Presented below is a list of items that may or may not be reported as inventory in a companys December 31 balance sheet. 1. Goods out on consignment at another companys store. 2. Goods sold on an...
-
The overall reaction and equilibrium constant value for a hydrogenoxygen fuel cell at 298 K is 2H 2 (g) + O 2 (g) 2H 2 O(l) K = 1.28 10 83 a. Calculate E cell and G 8 at 298 K for the fuel cell...
-
Explain what is meant by the statement The use of current liabilities as opposed to long-term debt subjects the firm to a greater risk of illiquidity.
-
Define the hedging principle. How can this principle be used in the management of working capital?
-
Define the following terms: a. Permanent asset investments b. Temporary asset investments c. Permanent sources of financing d. Temporary sources of financing e. Spontaneous sources of financing
-
Do the winners from free trade win the political argument? Why or why not? The winners from free trade win the political argument because, OA. do, members of Parliament need their votes OB. do not it...
-
22 Statistics Canada has recently reported historically high increases in the CPI. As Tiff Macklin, the governor of the Bank of Canada, noted, higher inflation in Canada will help some Canadians, but...
-
Projectile Motion Component of Motion Characteristics I. Horizontal 1. Affected by gravity II. Vertical 2. Exhibits uniform motion 3. Exhibits uniform accelerated motion 4. Component of initial...
Study smarter with the SolutionInn App