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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

jeff jeffy answered 1 year ago
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