Question

1. (Traditional bond) The Chevron Corporation has outstanding an issue of $1,000 face value, 8 1/2% coupon bonds that mature in 15 years. Calculate the value of one bond to an investor who requires a rate of return of:

a. 7%

b. 8.5%

c. 10%

d. 11.5%

Answer 1

Face Value = $1,000

Annual Coupon Rate = 8.50%
Annual Coupon = 8.50% * $1,000
Annual Coupon = $85

Time to Maturity = 15 years

Answer a.

Rate of Return = 7.00%

Value of Bond = $85 * PVIFA(7.00%, 15) + $1,000 * PVIF(7.00%, 15)
Value of Bond = $85 * (1 - (1/1.07)^15) / 0.07 + $1,000 * (1/1.07)^15
Value of Bond = $1,136.62

Answer b.

Rate of Return = 8.50%

Value of Bond = $85 * PVIFA(8.50%, 15) + $1,000 * PVIF(8.50%, 15)
Value of Bond = $85 * (1 - (1/1.085)^15) / 0.085 + $1,000 * (1/1.085)^15
Value of Bond = $1,000.00

Answer c.

Rate of Return = 10.00%

Value of Bond = $85 * PVIFA(10.00%, 15) + $1,000 * PVIF(10.00%, 15)
Value of Bond = $85 * (1 - (1/1.10)^15) / 0.10 + $1,000 * (1/1.10)^15
Value of Bond = $885.91

Answer d.

Rate of Return = 11.50%

Value of Bond = $85 * PVIFA(11.50%, 15) + $1,000 * PVIF(11.50%, 15)
Value of Bond = $85 * (1 - (1/1.115)^15) / 0.115 + $1,000 * (1/1.115)^15
Value of Bond = $790.10