Question

Bond Valuation and Interest Rate Risk

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 6%? Assume that there is only one more interest payment to be made on Bond S. Do not round intermediate calculations. 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. Do not round intermediate calculations. Round your answers to the nearest cent.

   Bond L: $  

   Bond S: $  

3. What will be the value of each of these bonds when the going rate of interest is 11%? Assume that there is only one more interest payment to be made on Bond S. Do not round intermediate calculations. Round your answers to the nearest cent.

   Bond L: $  

   Bond S: $  

Answer 1

a

Bond L

K = N

Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =15

Bond Price =∑ [(10*1000/100)/(1 + 6/100)^k]     +   1000/(1 + 6/100)^15

k=1

Bond Price = 1388.49

Bond S

K = N

Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =1

Bond Price =∑ [(10*1000/100)/(1 + 6/100)^k]     +   1000/(1 + 6/100)^1

k=1

Bond Price = 1037.74

b

Bond L

K = N

Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =15

Bond Price =∑ [(10*1000/100)/(1 + 9/100)^k]     +   1000/(1 + 9/100)^15

k=1

Bond Price = 1080.61

Bond S

K = N

Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =1

Bond Price =∑ [(10*1000/100)/(1 + 9/100)^k]     +   1000/(1 + 9/100)^1

k=1

Bond Price = 1009.17

c

Bond L

K = N

Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =15

Bond Price =∑ [(10*1000/100)/(1 + 11/100)^k]     +   1000/(1 + 11/100)^15

k=1

Bond Price = 928.09

Bond S

K = N

Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =1

Bond Price =∑ [(10*1000/100)/(1 + 11/100)^k]     +   1000/(1 + 11/100)^1

k=1

Bond Price = 990.99