Question
In: Finance
Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They...
- Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They are co-directors of the company’s pension fund management division. A major new client has requested that Mutual of Chicago present an investment seminar to illustrate the stock valuation process. As a result, Campbell and Morris have asked you to analyze the Bon Temps Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions.
- What is the value of a 1-year, $1,000 par value bond with a 8% annual coupon if its required rate of return is 12%? What is the value of a similar 10-year bond?
Solutions
Expert Solution
Value of a 1-Year Bond
The Price of the is the Present Value of the Coupon Payments plus the Present Value of the face Value
Face Value of the bond = $1,000
Annual Coupon Amount = $80 [$1,000 x 8%]
Annual Yield to Maturity = 12%
Maturity Period = 1 Year
Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value
= $80[PVIFA 12%, 1 Year] + $1,000[PVIF 12%, 1 Years]
= [$80 x 0.89286] + [$1,000 x 0.89286]
= $71.43 + $892.86
= $964.29
“Value of a 1-Year Bond = $964.29”
Value of a 10-Year Bond
The Price of the is the Present Value of the Coupon Payments plus the Present Value of the face Value
Face Value of the bond = $1,000
Annual Coupon Amount = $80 [$1,000 x 8%]
Annual Yield to Maturity = 12%
Maturity Period = 10 Year
Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value
= $80[PVIFA 12%, 10 Year] + $1,000[PVIF 12%, 10 Years]
= [$80 x 5.65022] + [$1,000 x .32197]
= $452.02 + $321.97
= $773.99
“Value of a 10-Year Bond = $773.99”
NOTE
-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.
--The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.
jeff jeffy answered 2 years agoRelated Solutions
Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They...
Robert Campbell and Carol Morris are senior vice-presidents of
the Mutual of Chicago Insurance Company. They are co-directors of
the company’s pension fund management division, with Campbell
having responsibility for fixed income securities (primarily bonds)
and Morris being responsible for equity investments. A major new
client, the California League of Cities, has requested that Mutual
of Chicago present an investment seminar to the mayors of the
represented cities. Campbell and Morris, who will make the actual
presentation, have asked you...
Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They...
Robert Campbell and Carol Morris are senior vice-presidents of
the Mutual of Chicago Insurance Company. They are co-directors of
the company’s pension fund management division. A major new client
has requested that Mutual of Chicago present an investment seminar
to illustrate the stock valuation process. As a result, Campbell
and Morris have asked you to analyze the Bon Temps Company, an
employment agency that supplies word processor operators and
computer programmers to businesses with temporarily heavy
workloads. You are to...
Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They...
Robert Campbell and Carol Morris are senior vice-presidents of
the Mutual of Chicago Insurance Company. They are co-directors of
the company's pension fund management division. A major new client
has requested that Mutual of Chicago present an investment seminar
to illustrate the stock valuation process. As a result, Campbell
and Morris have asked you to analyze the Bon Temps Company, an
employment agency that supplies word processor operators and
computer programmers to businesses with temporarily heavy
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Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They...
Robert Campbell and Carol Morris are senior vice-presidents of
the Mutual of Chicago Insurance Company. They are co-directors of
the company’s pension fund management division. A major new client
has requested that Mutual of Chicago present an investment seminar
to illustrate the stock valuation process. As a result, Campbell
and Morris have asked you to analyze the Bon Temps Company, an
employment agency that supplies word processor operators and
computer programmers to businesses with temporarily heavy
workloads. You are to...
Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They...
Robert Campbell and Carol Morris are senior vice-presidents of
the Mutual of Chicago Insurance Company. They are co-directors of
the company’s pension fund management division. A major new client
has requested that Mutual of Chicago present an investment seminar
to illustrate the stock valuation process. As a result, Campbell
and Morris have asked you to analyze the Bon Temps Company, an
employment agency that supplies word processor operators and
computer programmers to businesses with temporarily heavy
workloads. You are to...
Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They...
Robert Campbell and Carol Morris are
senior vice-presidents of the Mutual of Chicago Insurance Company.
They are co-directors of the company’s pension fund management
division. A major new client has requested that Mutual of Chicago
present an investment seminar to illustrate the stock valuation
process. As a result, Campbell and Morris have asked you to analyze
the Bon Temps Company, an employment agency that supplies word
processor operators and computer programmers to businesses with
temporarily heavy workloads. You are to...
Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They...
Robert Campbell and Carol Morris are senior vice-presidents of
the Mutual of Chicago Insurance Company. They are co-directors of
the company’s pension fund management division. A major new client
has requested that Mutual of Chicago present an investment seminar
to illustrate the stock valuation process. As a result, Campbell
and Morris have asked you to analyze the Bon Temps Company, an
employment agency that supplies word processor operators and
computer programmers to businesses with temporarily heavy
workloads. You are to...
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the Mutual Chicago Insurance Company. They are co- directors of the
company’s pension fund management division, with Campbell having
responsibility for fixed income securities (primarily bods) and
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the California League of Cities, has requested that Mutual of
Chicago present an investment seminar to the mayors of the
represented cities. Campbell and Morris, who will make the actual
presentation, have asked you...
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the company’s pension fund management division. A major new client
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and Morris have asked you to analyze the Bon Temps Company, an
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