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You own a bond with a par value of $1000 that pays a $100 annual coupon
You own a bond with a par value of $1000 that pays a $100 annual coupon. The bond matures in 15 years. Your required rate of return is 12% p.a.
(a) Calculate the value of the bond. (b) How does the value of the bond change if your required rate of return (i) increases to 15% p.a. or (ii) decreases to 8% p.a.? (c) Assume that the bond matured in 5 years instead of 15 years. Recompute your answers in part (b).
Expert Solution
a) Computation of Value of Bond using PV Function in Exce:
=-pv(rate,nper,pmt,fv)
Here,
PV = Value of Bond = ?
Rate = 12%
Nper = 15 years
PMT = $100
FV = $1,000
Substituting the values in formula:
=-pv(12%,15,100,1000)
PV or Price of Bond = $863.78
b-1) Computation of Value of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Value of Bond = ?
Rate = 15%
Nper = 15 years
PMT = $100
FV = $1,000
Substituting the values in formula:
=-pv(15%,15,100,1000)
PV or Price of Bond = $707.63
b-2) Computation of Value of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Value of Bond = ?
Rate = 8%
Nper = 15 years
PMT = $100
FV = $1,000
Substituting the values in formula:
=-pv(8%,15,100,1000)
PV or Price of Bond = $1,171.19
c-1) Computation of Value of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Value of Bond = ?
Rate = 15%
Nper = 5 years
PMT = $100
FV = $1,000
Substituting the values in formula:
=-pv(15%,5,100,1000)
PV or Price of Bond = $832.39
b-2) Computation of Value of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Value of Bond = ?
Rate = 8%
Nper = 5 years
PMT = $100
FV = $1,000
Substituting the values in formula:
=-pv(8%,5,100,1000)
PV or Price of Bond = $1,079.85
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