Tiling Corporation’s bonds pay $110 in annual interest, with a $1,000 par value. The bonds mature...

Tiling Corporation’s bonds pay $110 in annual interest, with a $1,000 par value. The bonds mature in 20 years. Your required rate of return is 9%.

a. Calculate the value of the bond

b. How does the value change if your required rate of return increases to 12%?

c. How does the value change if your required rate of return decreases to 6%?

Solutions

Expert Solution

Value of bond = Coupon * [1 - 1 / ( 1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Value of bond = 110 * [1 - 1 / (1 + 0.09)²⁰] / 0.09 + 1000 / (1 + 0.09)²⁰

Value of bond = 110 * 9.128546 + 178.43089

Value of bond = $1,182.57

Keys to use in a financial calculator: FV 1000, PMT 110, N 20, I/Y 9, CPT PV

When the rate increase, value of the bond should decrease.

Value of bond = Coupon * [1 - 1 / ( 1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Value of bond = 110 * [1 - 1 / (1 + 0.12)²⁰] / 0.12 + 1000 / (1 + 0.12)²⁰

Value of bond = 110 * 7.469444 + 103.666765

Value of bond = $925.31

Keys to use in a financial calculator: FV 1000, PMT 110, N 20, I/Y 12, CPT PV

When the rate decrease, value of the bond should increase.

Value of bond = Coupon * [1 - 1 / ( 1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Value of bond = 110 * [1 - 1 / (1 + 0.06)²⁰] / 0.06 + 1000 / (1 + 0.06)²⁰

Value of bond = 110 * 11.469921 + 311.804727

Value of bond = $1,573.50

Keys to use in a financial calculator: FV 1000, PMT 110, N 20, I/Y 6, CPT PV

jeff jeffy answered 1 year ago

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