Question

In: Finance

d. How is a bond’s value determined? What is the value of a 10-year, $1,000 par...

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.)

Solutions

Expert Solution

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.


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