Question

A bond of Telink Corporation pays ​$120 in annual​ interest, with a ​$1,000 par value. The bonds mature in 10 years. The​ market's required yield to maturity on a​ comparable-risk bond is 9 percent.

a.  Calculate the value of the bond.

b.  How does the value change if the​ market's required yield to maturity on a​ comparable-risk bond​ (i) increases to 14 percent or​ (ii) decreases to 4 ​percent?

c.  Interpret your findings in parts a and b.

Answer 1

  

_______________________________

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Answer a)

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 9%

And n is the no of Compounding periods 10 years

Coupon 120

=

= 1192.53

Answer b)

IF RATE IS 14%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 14%

And n is the no of Compounding periods 10 years

Coupon 120

=

= 895.68

IF THE RATE IS 4%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 4%

And n is the no of Compounding periods 10 years

Coupon 120

=

= 1648.87

Answer c)

The Relationship between interest rate and the value of the BOnd is inversly proportional. i.e. If the rate increases, the value of Bond decreases and vice - versa.

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