Concept explainers
(a)
To determine:
Introduction:
Bond is a fixed return investment in which an individual gives money to an entity and entity in return gives fixed return to him over the period of time and par value of the bond too at maturity.
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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