Question

An investor has two bonds in his portfolio that have  the face value of $1000 and pay a 10% annual coupon. Bond L matures in 15 years and Bond S matures in 1 year

(a). what will the value of each bond be if getting interest rate is 5%, 8%, and 12%. Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on bond L.

Present value=

payment=

future value=

annual rate=

periods=

compounding=

Answer 1

a. Bond S

Interest Rate is 5%

Payment =$1000 * 10% = $100

future value= $1000

annual rate= 5%

Periods = 1

Compounding= 1

Present Value = "PV(RATE,NPER,PMT,FV,TYPE)"

Present Value = "PV(0.05,1,-100,-1000,0)"

Present Value = $1047.62 <--- Price of Bond

Interest Rate is 8%

Payment =$1000 * 10% = $100

future value= $1000

annual rate= 8%

Periods = 1

Compounding= 1

Present Value = "PV(RATE,NPER,PMT,FV,TYPE)"

Present Value = "PV(0.08,1,-100,-1000,0)"

Present Value = $1018.52 <--- Price of Bond

Interest Rate is 12%

Payment =$1000 * 10% = $100

future value= $1000

annual rate= 12%

Periods = 1

Compounding= 1

Present Value = "PV(RATE,NPER,PMT,FV,TYPE)"

Present Value = "PV(0.12,1,-100,-1000,0)"

Present Value = $982.14 <--- Price of Bond

b. Bond L

Interest Rate is 5%

Payment =$1000 * 10% = $100

future value= $1000

annual rate= 5%

Periods = 15

Compounding= 15

Present Value = "PV(RATE,NPER,PMT,FV,TYPE)"

Present Value = "PV(0.05,15,-100,-1000,0)"

Present Value = $1518.98 <--- Price of Bond

Interest Rate is 8%

Payment =$1000 * 10% = $100

future value= $1000

annual rate= 8%

Periods = 1

Compounding= 1

Present Value = "PV(RATE,NPER,PMT,FV,TYPE)"

Present Value = "PV(0.08,15,-100,-1000,0)"

Present Value = $1171.19 <--- Price of Bond

Interest Rate is 12%

Payment =$1000 * 10% = $100

future value= $1000

annual rate= 12%

Periods = 1

Compounding= 1

Present Value = "PV(RATE,NPER,PMT,FV,TYPE)"

Present Value = "PV(0.12,15,-100,-1000,0)"

Present Value = $863.78 <--- Price of Bond