Smith's bonds have 10 years remaining to maturity. Interest is paid annually; they have a $1,000...

Smith's bonds have 10 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 6%; and the yield to maturity is 8%. What is the bond's current value? If the market interest rate on Smith's bond decreased to 4%, what would the price of the bond be today?

Expert Solution

ANSWER = 1

CALCULATION OF THE PRESENT VALUE OF THE BOND WITH YIELD TO MATURITY 8%
Step 1 : Calculation of Annual Coupon Payments
Par value of the bond issued is =			$ 1,000.00
Annual Coupon %			6.00%
Annual Coupon Amount			$ 60.00

Step 2: Calculate number of years to Maturity
Number of years to maturity = 10 years

Step 3 : Yield to Maturity = 8%, So discount rate = 8%

PVF = 1 / Discount rate = 1/ 1.08
Result of above will again divide by 1.08 , repeat this till last period

Option 1= Life of the bond is 10 years

CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE

Years	Interest	Amount	PVF @ 8%	PresentValue
1	Interest	$ 60.00	0.9259	$ 55.56
2	Interest	$ 60.00	0.8573	$ 51.44
3	Interest	$ 60.00	0.7938	$ 47.63
4	Interest	$ 60.00	0.7350	$ 44.10
5	Interest	$ 60.00	0.6806	$ 40.83
6	Interest	$ 60.00	0.6302	$ 37.81
7	Interest	$ 60.00	0.5835	$ 35.01
8	Interest	$ 60.00	0.5403	$ 32.42
9	Interest	$ 60.00	0.5002	$ 30.01
10	Interest	$ 60.00	0.4719	$ 28.32
10	Bond Value	$ 1,000.00	0.4719	$ 471.93
	Total			$ 875.06

	Current Value of the Bond =		$ 875.06





ANSWER = 2

CALCULATION OF THE PRESENT VALUE OF THE BOND WITH YIELD TO MATURITY 4%
Step 1 : Calculation of Annual Coupon Payments
Par value of the bond issued is =			$ 1,000.00
Annual Coupon %			6.00%
Annual Coupon Amount			$ 60.00

Step 2: Calculate number of years to Maturity
Number of years to maturity = 10 years

Step 3 : Market rate of interest Rate = 4%, So discount rate = 4%

PVF = 1 / Discount rate = 1/ 1.04
Result of above will again divide by 1.04 , repeat this till last period

Option 1= Life of the bond is 10 years

CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE

Years	Interest	Amount	PVF @ 4%	PresentValue
1	Interest	$ 60.00	0.9615	$ 57.69
2	Interest	$ 60.00	0.9246	$ 55.47
3	Interest	$ 60.00	0.8890	$ 53.34
4	Interest	$ 60.00	0.8548	$ 51.29
5	Interest	$ 60.00	0.8219	$ 49.32
6	Interest	$ 60.00	0.7903	$ 47.42
7	Interest	$ 60.00	0.7599	$ 45.60
8	Interest	$ 60.00	0.7307	$ 43.84
9	Interest	$ 60.00	0.7026	$ 42.16
10	Interest	$ 60.00	0.6756	$ 40.53
10	Bond Value	$ 1,000.00	0.6756	$ 675.56
	Total			$ 1,162.22

	Bonds Price is the today=		$ 1,162.22

jeff jeffy answered 2 years ago

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