Bond valuation An investor has two bonds in his portfolio that both have a face
ID: 2638690 • Letter: B
Question
Bond valuation
An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 18 years, while Bond S matures in 1 year.
Assume that only one more interest payment is to be made on Bond S at its maturity and that 18 more payments are to be made on Bond L.
What will the value of the Bond L be if the going interest rate is 5%? Round your answer to the nearest cent.
What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent.
What will the value of the Bond L be if the going interest rate is 10%? Round your answer to the nearest cent.
What will the value of the Bond S be if the going interest rate is 10%? Round your answer to the nearest cent.
What will the value of the Bond L be if the going interest rate is 14%? Round your answer to the nearest cent.
What will the value of the Bond S be if the going interest rate is 14%? Round your answer to the nearest cent.
Explanation / Answer
value of the Bond L be if the going interest rate is 5%=PV of annuity(A=90,N=18,I=5%)+PV(A=1000,N=18,I=5%)=11.6896*90+1000/(1.05^18) 1467.58 value of the Bond S be if the going interest rate is 5%=(1000+90)/(1.05) 1038.10 value of the Bond L be if the going interest rate is 10%=PV of annuity(A=90,N=18,I=10%)+PV(A=1000,N=18,I=10%)=8.2014*90+1000/(1.10^18) 917.98 value of the Bond S be if the going interest rate is 10%=(1000+90)/(1.10) 990.91 value of the Bond L be if the going interest rate is 14%=PV of annuity(A=90,N=18,I=14%)+PV(A=1000,N=18,I=14%)=6.4674*90+1000/(1.14^18) 676.63 value of the Bond S be if the going interest rate is 14%=(1000+90)/(1.14) 956.14