A bond you are evaluating has a 6

a). We can calculate the fair present value by using the following formula in excel:-

=-pv(rate,nper,pmt,fv)

Here,

PV = Fair present value

Rate = 6%/2 = 3% (semiannual)

Nper = 10*2 = 20 periods (semiannual)

Pmt = Coupon payment = $1,000*6.5%/2 = $32.50

FV = $1,000

Substituting the values in formula:

= -pv(3%,20,32.50,1000)

= $1,037.19

b). We can calculate the fair present value by using the following formula in excel:-

=-pv(rate,nper,pmt,fv)

Here,

PV = Fair present value

Rate = 8%/2 = 4% (semiannual)

Nper = 10*2 = 20 periods (semiannual)

Pmt = Coupon payment = $1,000*6.5%/2 = $32.50

FV = $1,000

Substituting the values in formula:

= -pv(4%,20,32.50,1000)

= $898.07

c). On the basis of parts (a) and (b), the required rate of return and fair values of bonds are inversely related to each other. If the required rate of return increases then the fair value of bond decreases and if the required rate of return decreases then the fair value of bond increases.