In: Finance

# An investor has two bonds in his portfolio that have a face value of $1,000 and... An investor has two bonds in his portfolio that have a face value of$1,000 and pay a 8% annual coupon. Bond L matures in 10 years, while Bond S matures in 1 year.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 10 more payments are to be made on Bond L.

1. What will the value of the Bond L be if the going interest rate is 6%? Round your answer to the nearest cent.
$What will the value of the Bond S be if the going interest rate is 6%? Round your answer to the nearest cent.$

What will the value of the Bond L be if the going interest rate is 8%? Round your answer to the nearest cent.
$What will the value of the Bond S be if the going interest rate is 8%? Round your answer to the nearest cent.$

What will the value of the Bond L be if the going interest rate is 14%? Round your answer to the nearest cent.
$What will the value of the Bond S be if the going interest rate is 14%? Round your answer to the nearest cent.$

## Solutions

##### Expert Solution

Bond S

 K = N Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N k=1 K =1 Bond Price =∑ [(8*1000/100)/(1 + 6/100)^k]     +   1000/(1 + 6/100)^1 k=1 Bond Price = 1018.87

Bond L

 K = N Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N k=1 K =10 Bond Price =∑ [(8*1000/100)/(1 + 6/100)^k]     +   1000/(1 + 6/100)^10 k=1 Bond Price = 1147.2

Bond S

 K = N Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N k=1 K =1 Bond Price =∑ [(8*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^1 k=1 Bond Price = 1000

Bond L

 K = N Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N k=1 K =10 Bond Price =∑ [(8*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^10 k=1 Bond Price = 1000

Bond S

 K = N Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N k=1 K =1 Bond Price =∑ [(8*1000/100)/(1 + 14/100)^k]     +   1000/(1 + 14/100)^1 k=1 Bond Price = 947.37

Bond L

 K = N Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N k=1 K =10 Bond Price =∑ [(8*1000/100)/(1 + 14/100)^k]     +   1000/(1 + 14/100)^10 k=1 Bond Price = 687.03