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Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley....

Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following questions:

a. Assuming interest is paid annually, calculate the values of the bonds if your required rates of return are as follows: Microsoft, 5.5 percent; GE Capital, 16.5 percent; and Morgan Stanley, 12 percent; where:

MICROSOFT	GE CAPITAL	MORGAN STANLEY
Coupon interest rate	5.25%	7.50%	8.00%
Years to maturity	26	22	18

b. The bonds are selling for the following amounts: Microsoft $1,057 GE Capital $547 Morgan Stanley $809

What are the expected rates of return for each bond?

c. How would the value of the bonds change if (1) your required rate of return increased 2

percentage points or (2) decreased 2 percentage points?

d. Explain the implications of your answers in part (c) in terms of interest rate risk, premium bonds, and discount bonds.

e. Should you buy the bonds? Explain.

Solutions

Expert Solution

Microsoft:

FV = 1000

R = 0.055

N = 26

PMT = 0.0525*1000 = 52.5

Using excel function, PV = PV(R,N,PMT,FV)

PV(0.055,26,-52.5,-1000) = $965.84

GE Capital:

FV = 1000

R = 0.165

N = 22

PMT = 0.075*1000 = 75

Using excel function, PV = PV(R,N,PMT,FV)

PV(0.165,22,-75,-1000) = $473.49

Morgan Stanley:

FV = 1000

R = 0.12

N = 18

PMT = 0.08*1000 = 80

Using excel function, PV = PV(R,N,PMT,FV)

PV(0.12,18,-80,-1000) = $710.01

Microsoft:

FV = 1000

PV = 1057

N = 26

PMT = 0.0525*1000 = 52.5

Using excel function, R = Rate(N,PMT,PV,FV)

Rate(26,-52.5,1057,-1000) = 0.0486 = 4.86%

GE Capital:

FV = 1000

PV = 547

N = 22

PMT = 0.075*1000 = 75

Using excel function, R = Rate(22,-75,547,-1000) = 0.1437 = 14.37%

Morgan Stanley:

FV = 1000

PV = 809

N = 18

PMT = 0.0*1000 = 80

Using excel function, R = Rate (18,-80,809,-1000) = 0.1039 = 10.39%

formula spreadsheet

From above, when the interest rate decreases value of the bond increases.

If the coupon rate is lower than the interest rate, bonds trade at discount. Similarly, if the coupon rate is higher than the interest rate, bonds trade at premium.

If the coupon rate is equal to the interest rate, then the bonds trade at par value.

jeff jeffy answered 1 month ago

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Here are data on ​$1,000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley....

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Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley....