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(Bond valuation relationships) A bard al Tear& Corp-74m pays S120 in a-raist riterest
(Bond valuation relationships) A bard al Tear& Corp-74m pays S120 in a-raist riterest. North a 51600 per valte The bonds mature trt 20 years The markers reputed retd to maturity on corrtrwiA4 rt.4 torvl ts 9 vicent. a, catwlmtte the witue of Ihe bond b, I tow does the value (Mar 4 the rnarkerfs required yield to mato* cat a comparattensk band (r) increases to 14 percent or (a) decreases to 6 percen() lutorpret your hhireqs at partsa arv1 b a, Mot is 6w vs4,re tho bon the motto" 'waxed Vold to mabsay ors a cornparabiensk bore) 5 9 percent (Round t the heam,,I Gym )
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Expert Solution
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.
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