Answer part three below: In 2007, $1,000 per value bonds Calculate the values of
ID: 2662648 • Letter: A
Question
Answer part three 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 Part three; How would the value of the bonds change if (1) the requiredrate of return increased 2 percent percentage points? (2) If the required rate of return deceased 2percentagepoints? Top rating for showing work! Answer part three 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 Part three; How would the value of the bonds change if (1) the requiredrate of return increased 2 percent percentage points? (2) If the required rate of return deceased 2percentagepoints? 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%+2% = 9%Putting values we get Vb=63.70(PVIFA 9%,3) + 1000(PVIF 9%,3) ie Vb = 63.70*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 63.70*[1/9% - 1/{9%*(1+9%)^3}] +1000*(1/(1+9%)^3) ie Vb = 63.70*(1/9% -8.5798) + 1000*0.7722 ie Vb = 63.7*2.5313 + 772.20 ie Vb= 161.24 + 772.20 = 933.44 So value of Bond is $933.44 for Smith
Donald : We have N=8yrs, M=Maturity value of bond = 1000, Coupon =7.875%. So INT = 7.875%*1000 = $78.75 & Reqd ReturnKd=7.5%+2% = 9.5%
Putting values we get Vb=78.75(PVIFA 9.5%,8) + 1000(PVIF 9.5%,8) ie Vb = 78.75*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 78.75*[1/9.5% - 1/{9.5%*(1+9.5%)^8}] +1000*(1/(1+9.5%)^8) ie Vb = 78.75*(1/9.5% -5.093) + 1000*0.4838 ie Vb = 78.75*5.4334 + 483.80 ie Vb= 911.68 So value of Bond is $911.68 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%+2% = 12%
Putting values we get Vb= 72(PVIFA 12%,11) + 1000(PVIF 12%,11) ie Vb = 72*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 72*[1/12% - 1/{12%*(1+12%)^11}] +1000*(1/(1+12%)^11) ie Vb = 72*(1/12% -2.3956) + 1000*0.287 ie Vb = 72*5.9377 + 287 ie Vb= = 714.51 So value of Bond is $714.51 for Cirus
When the Reqd rate of return decreases by 2%: 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%-2% = 5%
Putting values we get Vb=63.70(PVIFA 5%,3) + 1000(PVIF 5%,3) ie Vb = 63.70*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 63.70*[1/5% - 1/{5%*(1+5%)^3}] +1000*(1/(1+5%)^3) ie Vb = 63.70*(1/5% -17.277) + 1000*0.8638 ie Vb = 63.7*2.7232 + 863.80 ie Vb= 1037.27 So value of Bond is $1037.27 for Smith
Donald : We have N=8yrs, M=Maturity value of bond = 1000, Coupon =7.875%. So INT = 7.875%*1000 = $78.75 & Reqd ReturnKd=7.5%-2% = 5.5%
Putting values we get Vb=78.75(PVIFA 5.5%,8) + 1000(PVIF 5.5%,8) ie Vb = 78.75*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 78.75*[1/5.5% - 1/{5.5%*(1+5.5%)^8}] +1000*(1/(1+5.5%)^8) ie Vb = 78.75*(1/5.5% -11.847) + 1000*0.6516 ie Vb = 78.75*6.3346 + 651.60 ie Vb= 1150.44 So value of Bond is $1150.44 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% - 2% = 8%
Putting values we get Vb= 72(PVIFA 8%,11) + 1000(PVIF 8%,11) ie Vb = 72*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 72*[1/8% - 1/{8%*(1+8%)^11}] +1000*(1/(1+8%)^11) ie Vb = 72*(1/8% -5.361) + 1000*0.4289 ie Vb = 72*7.139 + 428.90 ie Vb= 942.90 So value of Bond is $942.90 for Cirus 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%+2% = 9%
Putting values we get Vb=63.70(PVIFA 9%,3) + 1000(PVIF 9%,3) ie Vb = 63.70*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 63.70*[1/9% - 1/{9%*(1+9%)^3}] +1000*(1/(1+9%)^3) ie Vb = 63.70*(1/9% -8.5798) + 1000*0.7722 ie Vb = 63.7*2.5313 + 772.20 ie Vb= 161.24 + 772.20 = 933.44 So value of Bond is $933.44 for Smith
Donald : We have N=8yrs, M=Maturity value of bond = 1000, Coupon =7.875%. So INT = 7.875%*1000 = $78.75 & Reqd ReturnKd=7.5%+2% = 9.5%
Putting values we get Vb=78.75(PVIFA 9.5%,8) + 1000(PVIF 9.5%,8) ie Vb = 78.75*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 78.75*[1/9.5% - 1/{9.5%*(1+9.5%)^8}] +1000*(1/(1+9.5%)^8) ie Vb = 78.75*(1/9.5% -5.093) + 1000*0.4838 ie Vb = 78.75*5.4334 + 483.80 ie Vb= 911.68 So value of Bond is $911.68 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%+2% = 12%
Putting values we get Vb= 72(PVIFA 12%,11) + 1000(PVIF 12%,11) ie Vb = 72*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 72*[1/12% - 1/{12%*(1+12%)^11}] +1000*(1/(1+12%)^11) ie Vb = 72*(1/12% -2.3956) + 1000*0.287 ie Vb = 72*5.9377 + 287 ie Vb= = 714.51 So value of Bond is $714.51 for Cirus
When the Reqd rate of return decreases by 2%: 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%-2% = 5%
Putting values we get Vb=63.70(PVIFA 5%,3) + 1000(PVIF 5%,3) ie Vb = 63.70*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 63.70*[1/5% - 1/{5%*(1+5%)^3}] +1000*(1/(1+5%)^3) ie Vb = 63.70*(1/5% -17.277) + 1000*0.8638 ie Vb = 63.7*2.7232 + 863.80 ie Vb= 1037.27 So value of Bond is $1037.27 for Smith
Donald : We have N=8yrs, M=Maturity value of bond = 1000, Coupon =7.875%. So INT = 7.875%*1000 = $78.75 & Reqd ReturnKd=7.5%-2% = 5.5%
Putting values we get Vb=78.75(PVIFA 5.5%,8) + 1000(PVIF 5.5%,8) ie Vb = 78.75*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 78.75*[1/5.5% - 1/{5.5%*(1+5.5%)^8}] +1000*(1/(1+5.5%)^8) ie Vb = 78.75*(1/5.5% -11.847) + 1000*0.6516 ie Vb = 78.75*6.3346 + 651.60 ie Vb= 1150.44 So value of Bond is $1150.44 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% - 2% = 8%
Putting values we get Vb= 72(PVIFA 8%,11) + 1000(PVIF 8%,11) ie Vb = 72*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 72*[1/8% - 1/{8%*(1+8%)^11}] +1000*(1/(1+8%)^11) ie Vb = 72*(1/8% -5.361) + 1000*0.4289 ie Vb = 72*7.139 + 428.90 ie Vb= 942.90 So value of Bond is $942.90 for Cirus 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%-2% = 5%
Putting values we get Vb=63.70(PVIFA 5%,3) + 1000(PVIF 5%,3) ie Vb = 63.70*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 63.70*[1/5% - 1/{5%*(1+5%)^3}] +1000*(1/(1+5%)^3) ie Vb = 63.70*(1/5% -17.277) + 1000*0.8638 ie Vb = 63.7*2.7232 + 863.80 ie Vb= 1037.27 So value of Bond is $1037.27 for Smith
Donald : We have N=8yrs, M=Maturity value of bond = 1000, Coupon =7.875%. So INT = 7.875%*1000 = $78.75 & Reqd ReturnKd=7.5%-2% = 5.5%
Putting values we get Vb=78.75(PVIFA 5.5%,8) + 1000(PVIF 5.5%,8) ie Vb = 78.75*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 78.75*[1/5.5% - 1/{5.5%*(1+5.5%)^8}] +1000*(1/(1+5.5%)^8) ie Vb = 78.75*(1/5.5% -11.847) + 1000*0.6516 ie Vb = 78.75*6.3346 + 651.60 ie Vb= 1150.44 So value of Bond is $1150.44 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% - 2% = 8%
Putting values we get Vb= 72(PVIFA 8%,11) + 1000(PVIF 8%,11) ie Vb = 72*[1/Kd - 1/{Kd(1+Kd)^N}] +1000*(1/(1+Kd)^N ie Vb = 72*[1/8% - 1/{8%*(1+8%)^11}] +1000*(1/(1+8%)^11) ie Vb = 72*(1/8% -5.361) + 1000*0.4289 ie Vb = 72*7.139 + 428.90 ie Vb= 942.90 So value of Bond is $942.90 for Cirus