Assuming that the current interest rate is 10 percent, compute the present value
ID: 1227362 • Letter: A
Question
Assuming that the current interest rate is 10 percent, compute the present value of a five-year, 5 percent coupon bond with a face value of $500. What happens when the interest rate goes to 11 percent? What happens when the interest rate goes to 9 percent? Instruction: Round your answers to the nearest penny (2 decimal places). PV at an interest rate of 10% = $ PV at an interest rate of 11% = $ The present value when the interest rate rises to 11 percent. PV at an interest rate of 9% = $ The present value when the interest rate falls to 9 percent.
Explanation / Answer
Annual coupon payment = $500 x 5% = $25
PV of bond = PV of annual coupon payments + PV of redemption value (coupon value)
(1) Interest rate = 10%
PV ($) = 25 x PVIFA(10%, 5) + 500 x PVIF(10%, 5)
= 25 x 3.7908 + 500 x 0.6209
= 94.77 + 310.46
= 405.23
(2) Interest rate = 11%
PV ($) = 25 x PVIFA(11%, 5) + 500 x PVIF(11%, 5)
= 25 x 3.6959 + 500 x 0.5935
= 92.40 + 296.73
= 389.13
(3) Interest rate = 9%
PV ($) = 25 x PVIFA(9%, 5) + 500 x PVIF(9%, 5)
= 25 x 3.8897 + 500 x 0.6499
= 97.24 + 324.97
= 422.21