Question
In: Finance
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
a)
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
b)
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
c)
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
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