What is the value of a 10-year, PKR 100,000 par value bond with a 12% annual...

What is the value of a 10-year, PKR 100,000 par value bond with a 12% annual coupon if its required rate of return is 14%? e. (1) What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 5 percentage points, causing investors to require a 19% return? Would we now have a discount or a premium bond? (2) What would happen to the bond’s value if inflation fell and Kd (Cost of Debt) declined to 7%? Would we now have a premium or a discount bond? (3) What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%?

Solutions

Expert Solution

With YTM 14%, value of the bond= PKR 89,567.77 It is a discount bond.

(e ) 1. Value if the YTM increased to 19%=PKR 69,627.46 It is a discount bond

2. Value if the YTM decreased to 7%= PKR 135,117.91 It is a premium bond

3. Value, if the YTM is 13%= PKR 94,573.76 It is on discount. If the YTM remained at 13%, over time, the value will gradually increase and reach face value (PKR 100,000) by the maturity date.

As stated in part 2 above, at YTM of 7%, the bond is on premium. If the YTM remained at 7%, over time, the value will gradually decrease and reach face value (PKR 100,000) by the maturity date.

Calculations as follows:

jeff jeffy answered 1 year ago

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