Intro

One of IBM's bond issues has an annual coupon rate of 3.8%, a face value of $1,000 and matures in 9 years. Attempt 1/5 for 10 pts. Part 1 What is the value (or price) of the bond if the required return is 5%?

The fair value (or price) of a bond is the present value of all cash flows. We can use the annuity formula to find the present value of the interest payments (coupons) and then add the present value of the face value.

P = I N T r d [ 1 1 ( 1 + r d ) n ] + M ( 1 + r d ) n = 38 0.05 [ 1 1 ( 1 + 0.05 ) 9 ] + 1,000 ( 1 + 0.05 ) 9 = 914.71

Using a financial calculator: N I/Y PV PMT FV Inputs 9 5 38 1,000 Compute -914.71

Calculating PV gives a value of $914.71. Using Excel (do not enter the thousands separators): =PV(rate, nper, pmt, fv) =PV(0.05, 9, -38, -1,000) =914.71

Part 2

What is the value of the bond if the required return is 6%?