1.You bought a 20 year corporate bond 5 years ago.You paid $1,000 for it (its par or maturity value). Your bond pays 6% interest.During the five years you have owned it, interest rates have changed.Similar bonds now pay 8% interest (an increase of 200 basis points).You sell your bond in the secondary market.What would be the amount you should receive?

Required:

Ask yourself:did my bond go up or down in value, or did it stay at $1,000?

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You should always anticipate what your final answer should look like.That's why I am asking this question!

Let's calculate the answer.

Write the basic equation for the value of a bond.

B = I (PVIFA_i,n) + M (PVIF_i,n)

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Next:what should be the value for "I"?(Capital "I") $60

OK how about the value for "i"(lower case "i") - it appears twice in the formula:

8%

Now using the equation, plug in all the numbers you know INCLUDING the values for PVIFA (from financial table 4) and PVIF (from financial table 2)

B = $60 (8.560) + $1,000 (.315)the "Factors" are from tables 2and 4 for 8%, 15 Years

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Now the fun part:calculate the answer!

B = $513.60 + $315.00 = $828.60

1.OK - using most of the above data, let's make this change:

You didn't buy the bond 5 years ago, you bought it 15 years ago.Now what is your answer?

You should anticipate what will happen!

B = $60 (3.993) + $1,000 (.681) = $239.58 + $681 = $920.58

With LESS time to maturity the bond will still be below $1,000 but it shouldn't have dropped as much as above - it should be in thehigher than $828.60 but lower than $1,000.

2.Last part - going back to the original question (you bought it 5 years ago) what would be the value of your bond IF interest rates didn't change, that is they stayed at 6%?I need to see all your work.