Question

Telnik Corporation bonds pay $82.50 in interest, paid semi-annually with a $1,000 par value. The bonds mature in 15 years. Your required rate of return is 9 percent.

A. Calculate the value of the bond

B. Calculate the value of the bond if interest rates unexpectedly increased by 1%

C. An alternative investment offers the same coupon rate but matures in 5 years. What would be its value at a required return of 9 percent and 10 percent

D. Explain why the market would require a lower return on the alternative investment than on the alternative investment

Answer 1

A)Price : [PVA 9%,15*Interest]+[PVF9%,15*Face value]

           =[8.06069*82.5]+[.27454*1000]

           = 665.01+ 274.54

           = $ 939.55

B)Yield :9+1=10%

[PVA 10%,15*Interest]+[PVF10%,15*Face value]

           =[7.60608*82.5]+[..23939*1000]

            = 627.50+ 239.39

           = 866.89

c)[PVA 9%,5*Interest]+[PVF9%,5*Face value]

           =[3.88965*82.5]+[..64993*1000].

            = 320.90+ 649.93

              = 970.83

[PVA 10%,5*Interest]+[PVF10%,5*Face value]

           =[3.79079*82.5]+[..62092*1000]

            = 312.74+ 620.92

             = $ 933.66

D)An alternative investment requires lower return due to less risk involved as to maturity (number of years ).With increase in years to maturity ,risk increases and so as yield to maturity .