Question

The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.

1. What will be the value of each of these bonds when the going rate of interest is 4%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

   Bond L	$
   Bond S	$

   
   
2. What will be the value of each of these bonds when the going rate of interest is 9%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

   Bond L	$
   Bond S	$

Answer 1

Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at Yield to Maturity(YTM).

What will be the value of each of these bonds when the going rate of interest is 4%?

BOND L

Year	Cash flow	PVAF/PVF@4%	Present Value (Cashflow*PVAF/PVF)
1-15	100	11.1184	1111.84
15	1000	0.55526	555.26

Current Market Price of Bonds = 1111.84+555.26

= $1667.10

BOND S

Present Value = Future Value / (1+rate per period)^no. of periods

= (100+1000)/1.04^1

= 1100/1.04

= 1057.69

What will be the value of each of these bonds when the going rate of interest is 9%?

BOND L

Year	Cash flow	PVAF/PVF@9%	Present Value (Cashflow*PVAF/PVF)
1-15	100	8.0607	806.07
15	1000	0.27454	274.54

Current Market Price of Bonds = 806.07+274.54

= $1080.61

BOND S

Present Value = Future Value / (1+rate per period)^no. of periods

= (100+1000)/1.09^1

= 1100/1.09

= 1009.17