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Q1-Assume a healthcare organization sold bonds that have a 10 year maturity, a 12% coupon rate...

Q1-Assume a healthcare organization sold bonds that have a 10 year maturity, a 12% coupon rate with annual payments, a $1000 par value:

a-suppose that 2 years after the bonds were issued, the required interest rate fell to 7%. What would be the bond's value?

b-Suppose the 2 years after the bonds were issued, the required interest rate rose to 13%. What would be the bonds value?

c-What would be the value of the bonds 3 years after issue in each scenario above, assuming the interest rate stayed steady at either 7% or 13%?

Please show all the formulas used for solving each question & do not use excel to solve for the above questions.

Solutions

Expert Solution

a-suppose that 2 years after the bonds were issued, the required interest rate fell to 7%. What would be the bond's value

time to maturity = 8years

coupon = 1000 x 12% = $120

Maturity Value = $ 1000

yield = 7%

Price of bond = coupon x PVAF_(7%,8years) + maturity value / (1+7%)⁸

Price of bond = 120 x 5.9713 + 1000/(1.07)⁸

Price of bond = $1,298.57

b-suppose that 2 years after the bonds were issued, the required interest rate rose to 13%. What would be the bond's value

time to maturity = 8years

coupon = 1000 x 12% = $120

Maturity Value = $ 1000

yield = 13%

Price of bond = coupon x PVAF_(13%,8years) + maturity value / (1+13%)⁸

Price of bond = 120 x 4.7988 + 1000/(1.13)⁸

Price of bond = $952.02

c suppose that 3 years after the bonds were issued, the required interest rate fell to 7%. What would be the bond's value

time to maturity = 7years

coupon = 1000 x 12% = $120

Maturity Value = $ 1000

yield = 7%

Price of bond = coupon x PVAF_(7%,7years) + maturity value / (1+7%)⁷

Price of bond = 120 x 5.3893 + 1000/(1.07)⁷

Price of bond = $1,269.47

suppose that 3 years after the bonds were issued, the required interest rate rose to 13%. What would be the bond's value

time to maturity = 7years

coupon = 1000 x 12% = $120

Maturity Value = $ 1000

yield = 13%

Price of bond = coupon x PVAF_(13%,7years) + maturity value / (1+13%)⁷

Price of bond = 120 x 4.4226 + 1000/(1.13)⁷

Price of bond = $ 955.77

Give a thumbs up if satisfied. Thanks :)

jeff jeffy answered 1 year ago

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