Question

Bonus Value. You have a bond that pays $ 100 of annual interest, with a value of $ 1,000 and matures in 15 years. Your required rate of return is 12%. a. Calculate the value of the bonus b. How does the value change if your required rate of return: 1. Increase to 15% 2. Decrease to 8% c. Assume that the bond matures in 5 years instead of 15 years. Re-compute your answers in part b.

Answer 1

a]

Value of bond is calculated using PV function in Excel :

rate = 12% (required return)

nper = 15 (number of interest payments = years to maturity)

pmt = 100 (annual interest)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $863.78

b]

1]

Value of bond is calculated using PV function in Excel :

rate = 15% (required return)

nper = 15 (number of interest payments = years to maturity)

pmt = 100 (annual interest)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $707.63

2]

Value of bond is calculated using PV function in Excel :

rate = 8% (required return)

nper = 15 (number of interest payments = years to maturity)

pmt = 100 (annual interest)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $1,171.19

c]

1]

Value of bond is calculated using PV function in Excel :

rate = 15% (required return)

nper = 5 (number of interest payments = years to maturity)

pmt = 100 (annual interest)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $832.39

2]

Value of bond is calculated using PV function in Excel :

rate = 8% (required return)

nper = 5 (number of interest payments = years to maturity)

pmt = 100 (annual interest)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $1,079.85