Answer part two below: In 2007, $1,000 per value bonds Calculate the values of b
ID: 2662647 • Letter: A
Question
Answer part two below: In 2007, $1,000 per value bonds Calculate the values of bonds if the required rate of returnare as follows; Smith 7%, Donald 7.5% and Cirrus at 10%Smith Donald Cirrus
Coupon interestrate; 6.37% 7.875% 7.2%
Years tomaturity; 3 8 11 Part two: at the end of 2006, the bonds were selling at; Smith $983.75 Donald $1,030.00 Cirrus $1,047.50 What were the expected rate of return for each bond? Top rating for showing work! Answer part two below: In 2007, $1,000 per value bonds Calculate the values of bonds if the required rate of returnare as follows; Smith 7%, Donald 7.5% and Cirrus at 10% Smith Donald Cirrus Coupon interestrate; 6.37% 7.875% 7.2% Years tomaturity; 3 8 11 Part two: at the end of 2006, the bonds were selling at; Smith $983.75 Donald $1,030.00 Cirrus $1,047.50 What were the expected rate of return for each bond? Top rating for showing work!
Explanation / Answer
Value of Bond Vb = INT(PVIFA Kd,N) + M(PVIF Kd,N) Smith : We have N=3yrs, M=Maturity value of bond = 1000, Coupon = 6.37%. So INT = 6.37%*1000 = $63.70 & Reqd ReturnKd=7% We have N=3yrs, M=Maturity value of bond = 1000, Coupon = 6.37%. So INT = 6.37%*1000 = $63.70 & Reqd ReturnKd=7%Putting values we get Vb=63.70(PVIFA 7%,3) + 1000(PVIF 7%,3) ie Vb = 63.70*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 63.70*[1/7% - 1/{7%*(1+7%)^3}] + 1000*(1/(1+7%)^3) ie Vb = 63.70*(1/7% -11.661) + 1000*0.8163 ie Vb = 63.7*2.625 + 816.30 ie Vb= 167.20 + 816.30 = 983.50 So value of Bond is $983.50 for Smith
Donald : We have N=8yrs, M=Maturity value of bond = 1000, Coupon =7.875%. So INT = 7.875%*1000 = $78.75 & ReqdReturn Kd=7.5%
Putting values we get Vb=78.75(PVIFA 7.5%,8) + 1000(PVIF 7.5%,8) ie Vb = 78.75*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 78.75*[1/7.5% - 1/{7.5%*(1+7.5%)^8}] +1000*(1/(1+7.5%)^8) ie Vb = 78.75*(1/7.5% -7.476) + 1000*0.561 ie Vb = 78.75*5.857 + 561 ie Vb= 461.26 + 561 = 1022.26 So value of Bond is $1022.26 for Donald Donald : We have N=8yrs, M=Maturity value of bond = 1000, Coupon =7.875%. So INT = 7.875%*1000 = $78.75 & ReqdReturn Kd=7.5%
Putting values we get Vb=78.75(PVIFA 7.5%,8) + 1000(PVIF 7.5%,8) ie Vb = 78.75*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 78.75*[1/7.5% - 1/{7.5%*(1+7.5%)^8}] +1000*(1/(1+7.5%)^8) ie Vb = 78.75*(1/7.5% -7.476) + 1000*0.561 ie Vb = 78.75*5.857 + 561 ie Vb= 461.26 + 561 = 1022.26 So value of Bond is $1022.26 for Donald
Cirrus : We have N=11yrs, M=Maturity value of bond = 1000, Coupon = 7.2%. So INT = 7.2%*1000 = $72 & ReqdReturn Kd=10%
Putting values we get Vb= 72(PVIFA 11%,11) + 1000(PVIF 11%,11) ie Vb = 72*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 72*[1/11% - 1/{11%*(1+11%)^11}] +1000*(1/(1+11%)^11) ie Vb = 72*(1/11% -2.8844) + 1000*0.3173 ie Vb = 72*6.2065 + 317.30 ie Vb= 446.87+ 317.30 = 764.17 So value of Bond is $764.17 for Cirus Cirrus : We have N=11yrs, M=Maturity value of bond = 1000, Coupon = 7.2%. So INT = 7.2%*1000 = $72 & ReqdReturn Kd=10%
Putting values we get Vb= 72(PVIFA 11%,11) + 1000(PVIF 11%,11) ie Vb = 72*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 72*[1/11% - 1/{11%*(1+11%)^11}] +1000*(1/(1+11%)^11) ie Vb = 72*(1/11% -2.8844) + 1000*0.3173 ie Vb = 72*6.2065 + 317.30 ie Vb= 446.87+ 317.30 = 764.17 So value of Bond is $764.17 for Cirus
Part II 1. Smith : Vb =PV= $983.75, Nper=3yrs, M=Maturity valueof bond = 1000=FV, Coupon = 6.37%. So PMT = 6.37%*1000 =$63.70 & Reqd Return Kd= ??? Using Excel Rate Function, we find Kd So Kd = Rate(nper, Pmt, PV, FV) ie Kd = Rate (3, 63.70, -983.75, 1000) = 6.99%
Using Excel Rate Function, we find Kd So Kd = Rate(nper, Pmt, PV, FV) ie Kd = Rate (3, 63.70, -983.75, 1000) = 6.99%
Donald $1,030.00=PV, Nper=8yrs, M=Maturity value of bond= 1000=FV, Coupon = 7.875%. So PMT = 7.875%*1000 = $78.75& Reqd Return Kd= ??? Using Excel Rate Function, we find Kd So Kd = Rate(nper, Pmt, PV, FV) ie Kd = Rate (8, 78.75,- 1030, 1000) = 7.37% Donald $1,030.00=PV, Nper=8yrs, M=Maturity value of bond= 1000=FV, Coupon = 7.875%. So PMT = 7.875%*1000 = $78.75& Reqd Return Kd= ??? Using Excel Rate Function, we find Kd So Kd = Rate(nper, Pmt, PV, FV) ie Kd = Rate (8, 78.75,- 1030, 1000) = 7.37% Using Excel Rate Function, we find Kd So Kd = Rate(nper, Pmt, PV, FV) ie Kd = Rate (8, 78.75,- 1030, 1000) = 7.37%
Cirrus $1,047.50 =PV, Nper=11yrs, M=Maturity value ofbond = 1000=FV, Coupon = 7.2%. So PMT = 7.2%*1000 = $72 &Reqd Return Kd= ??? Using Excel Rate Function, we find Kd So Kd = Rate(nper, Pmt, PV, FV) ie Kd = Rate (11, 72,- 1047.50, 1000) = 6.58%
Using Excel Rate Function, we find Kd So Kd = Rate(nper, Pmt, PV, FV) ie Kd = Rate (11, 72,- 1047.50, 1000) = 6.58%