In: Finance
d. How is a bond’s value determined? What is the value of a
10-year, $1,000 par value bond with a 10% annual coupon if its
required return is 10%? = $1,000
e. Please provide your response for the following;
1. What is the value of a 13% coupon bond that is otherwise
identical to the bond described in part d? Would we now have a
discount or a premium bond?
2. What is the value of a 7% coupon bond with these
characteristics? Would we now have a discount or premium
bond?
3. What would happen to the values of the 7%, 10%, and 13% coupon
bonds over time if the required return remained at 10%? (Hint: With
a financial calculator, enter PMT, I/YR, FV, and N; then change
(override) N to see what happens to the PV as it approaches
maturity.)
d.Information provided:
Par value= future value= $1,000
Time= 10 years
Coupon rate= 10%
Coupon payment= 10%* $1,000= $100
Yield to maturity= 10%
The bond's value is calculated by computing the present value of the bond.
Enter the below in a financial calculator to compute the present value:
FV= 1,000
PMT= 100
I/Y= 10
N= 10
Press the CPT key and PV to compute the present value.
The value obtained is 1,000.
Therefore, the value of the bond is $1,000.
e.1.Information provided:
Par value= future value= $1,000
Time= 10 years
Coupon rate= 13%
Coupon payment= 13%* $1,000= $130
Yield to maturity= 10%
The bond's value is calculated by computing the present value of the bond.
Enter the below in a financial calculator to compute the present value:
FV= 1,000
PMT= 130
I/Y= 10
N= 10
Press the CPT key and PV to compute the present value.
The value obtained is 1,184.34.
Therefore, the price of the bond is $1,184.34.
The bond is a premium bond since it is trading above the par value.
e.2.Information provided:
Par value= future value= $1,000
Time= 10 years
Coupon rate= 7%
Coupon payment= 7%* $1,000= $70
Yield to maturity= 10%
The bond's value is calculated by computing the present value of the bond.
Enter the below in a financial calculator to compute the present value:
FV= 1,000
PMT= 70
I/Y= 10
N= 10
Press the CPT key and PV to compute the present value.
The value obtained is 815.66.
Therefore, the price of the bond is $815.66.
The bond is a discount bond since it is trading below the par value.
e.3. The value of the bond will trade below the par value when the bond is a 7% coupon bond.
The value of the bond will trade at the par value when the bond is a 10% coupon bond.
The value of the bond will trade above the par value when the bond is a 13% coupon bond.