cure ork Check My Work BOND VALUATION Assume that only one m

cure ork Check My Work BOND VALUATION Assume that only one more interest payment is to be made on Bond S at its maturity and that 13 more payments are to be made on Bond L a. what will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent. DOLL

Solution

Answer to Question 1:

Answer a.

Face Value = $1,000
Annual Coupon = 11% * $1,000 = $110

If interest rate is 4%:

Bond L:

Price of Bond = $110 * PVIFA(4%, 13) + $1,000 * PVIF(4%, 13)
Price of Bond = $110 * (1 - (1/1.04)^13) / 0.04 + $1,000 / 1.04^13
Price of Bond = $1,699.00

Bond S:

Price of Bond = $1,000 * PVIF(4%, 1)
Price of Bond = $1,000 / 1.04
Price of Bond = $961.54

If interest rate is 8%:

Bond L:

Price of Bond = $110 * PVIFA(8%, 13) + $1,000 * PVIF(8%, 13)
Price of Bond = $110 * (1 - (1/1.08)^13) / 0.08 + $1,000 / 1.08^13
Price of Bond = $1,237.11

Bond S:

Price of Bond = $1,000 * PVIF(8%, 1)
Price of Bond = $1,000 / 1.08
Price of Bond = $925.93

If interest rate is 12%:

Bond L:

Price of Bond = $110 * PVIFA(12%, 13) + $1,000 * PVIF(12%, 13)
Price of Bond = $110 * (1 - (1/1.12)^13) / 0.12 + $1,000 / 1.12^13
Price of Bond = $935.76

Bond S:

Price of Bond = $1,000 * PVIF(12%, 1)
Price of Bond = $1,000 / 1.12
Price of Bond = $892.86

Answer b.

Long-term bond’s price fluctuate more than short-term bond’s price due to greater duration.