a) Computation of Value of Bond using PV Function in Excel:

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

Here,

PV = Value of Bond = ?

Rate = 9%

Nper = 20 years

PMT = 120

FV = $1,000

Substituting the values in formula:

=-pv(9%,20,120,1000)

PV or Value of Bond = $1,273.86

 

 

b) Computation of Value of Bond using PV Function in Excel:

1) Yield to Maturity is 14%:

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

Here,

PV = Value of Bond = ?

Rate = 14%

Nper = 20 years

PMT = 120

FV = $1,000

Substituting the values in formula:

=-pv(14%,20,120,1000)

PV or Value of Bond = $867.54

 

2) Yield to Maturity is 6%:

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

Here,

PV = Value of Bond = ?

Rate = 6%

Nper = 20 years

PMT = 120

FV = $1,000

Substituting the values in formula:

=-pv(6%,20,120,1000)

PV or Value of Bond = $1,688.20

 

c) As long as the yield to maturity remains below the coupon rate, i.e 9% in this case, the value of the bond is above par or it sells at a premium. But if the YTM increases beyond the coupon rate, the price of the bond falls below par.