Question

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Choice Hotels International originally issued a 10 ⅜ bond in 1992. These $1,000 par value bonds...

Choice Hotels International originally issued a 10 ⅜ bond in 1992. These $1,000 par value bonds mature in five years. What is the value of the Choice Hotels International bond at each of the following required rates of return, assuming the investor will hold the bond to maturity? Assume the coupons are paid annually.

a.8%

b.10.375%

c.12.5%

Expert Solution

Use PV function in EXCEL to find the value of the bond

=PV(rate,nper,pmt,fv,type)

1) rate=required rate=8%

nper=5 years

pmt=coupon=coupon rate*face value=10.375%*1000=103.75 (10 3/8=10.375%)

fv=face value=1000

=PV(8%,5,103.75,1000,0)=$1094.83

Price of the bond=$1094.83

2) rate=10.375% and everything remains same.

=PV(10.375%,5,103.75,1000,0)=$1000

Price of the bond=$1000

3) rate=12.5%

=PV(12.5%,5,103.75,1000,0)=$924.34

Price of bond=$924.34

jeff jeffy answered 2 years ago

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