6) Calculate the fair present values of the following bonds, all of which pay interest semiannually,...

6) Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $1,000, have 12 years remaining to maturity, and have a required rate of return of 8 percent.

a. The bond has a 6 percent coupon rate.

b. The bond has a 8 percent coupon rate.

c. The bond has a 10 percent coupon rate.

d. What do your answers to part (a) through (c) say about the relation between coupon rates and present values?

Solutions

Expert Solution

For a, b and c:

Using financial calculator BA II Plus - Input details:	a.	b.	c.
I/Y = Rate/Frequency =	4.000000	4.000000	4.000000
PMT = Coupon rate / Frequency x FV =	-$30.00	-$40.00	-$50.00
N = Number of years remaining x frequency =	24	24	24
FV = Future Value =	-$1,000.00	-$1,000.00	-$1,000.00
CPT > PV = Present value =	$847.53	$1,000.00	$1,152.47
Formula based present value of annuity:
PV = \|PMT\| x ((1-(1+R%)^-N)/R% + \|FV\|/(1+R%)^N =	$847.53	$1,000.00	$1,152.47

d. Rest all remains equal, as we increase coupon rate the price of the bond increasing. The coupon rates and PVs or bond prices are positively related.

jeff jeffy answered 1 year ago

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