Concept explainers
(a)
To determine:
Introduction:
Bond is a fixed
Explanation of Solution
Formula to calculate value of bond is,
Where,
- P is value of bond.
- C is coupon rate.
- i is Required
rate of return. - n is number of years.
- FV is
future value .
For 7 years:
Given,
C is 10%.
i is 8%.
n is 7 years.
FV is $1,000.
Substitute 10% for C, 8% fori, 7 years for n and $1,000 for FV in the above equation (1).
Value of bond is $1,104.13.
For 5 years:
Given,
C is 10%.
i is 8%.
n is 5 years.
FV is $1,000.
Substitute 10% for C, 8% fori, 5 years for n and $1,000 for FV in the above equation (1).
Value of bond is $1,079.85.
For 2 years:
Given,
C is 10%.
i is 8%.
n is 2 years.
FV is $1,000.
Substitute 10% for C, 8% fori, 2 years for n and $1,000 for FV in the above equation (1).
Value of bond is $1,035.67.
Hence, Value of bond for 7, 5 and 2 year before maturity is $1,104.13, $1,079.85 and $1,035.67.
(b)
To determine:
Value of bond.
Explanation of Solution
For 7 years:
Given,
C is 6%.
i is 8%.
n is 7 years.
FV is $1,000.
Substitute 6% for C, 8% fori, 7 years for n and $1,000 for FV in the above equation (1).
Value of bond is $895.90.
For 5 years:
Given,
C is 6%.
i is 8%.
n is 5 years.
FV is $1,000.
Substitute 6% for C, 8% fori, 5 years for n and $1,000 for FV in the above equation (1).
Value of bond is $920.10.
For 2 years:
Given,
C is 6%.
i is 8%.
n is 2 years.
FV is $1,000.
Substitute 6% for C, 8% fori, 2 years for n and $1,000 for FV in the above equation (1).
Value of bond is $964.3.
Hence, Value of bond for 7, 5 and 2 year before maturity is $895.90, $920.10 and $964.30.
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Chapter 13 Solutions
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