Pearson eText Foundations of Finance -- Instant Access (Pearson+)
10th Edition
ISBN: 9780135639382
Author: Arthur Keown, John Martin
Publisher: PEARSON+
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Chapter 7, Problem 11SP
a.
Summary Introduction
To determine: The value of bond.
b.
Summary Introduction
To determine: The value of bond if the required
c.
Summary Introduction
To discuss: The implications from the result from Part B.
d.
Summary Introduction
To determine: The value of bond if the bond matures in 10 years.
e.
Summary Introduction
To discuss: The implications from the result from Part D.
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(Bond valuation) You own a bond that pays $120 in annual interest, with a $1,000 par value. It matures in 20 years. Your required rate of return is 11 percent
a. Calculate the value of the bond.
b. How does the value change if your required rate of return (1) increases to 15 percent or (2) decreases to 7 percent?
c. Explain the implications of your answers in part b as they relate to interest rate risk, premium bonds, and discount bonds.
d. Assume that the bond matures in 4 years instead of 20 years. Recompute your answers in part b.
e. Explain the implications of your answers in part d as they relate to interest rate risk, premlum bonds, and discount bonds.
3. Assume you purchased a bond for $9,186. The bond pays $300 interest every six months. You sell the bond after 18
months for $10,000. Calculate the following:
a. Income.
b. Capital gain (or loss).
c. Total return in dollars and as a percentage of the original investment.
Review Only
Click the icon to see the Worked Solution.
a. The current income is $
(Round to the nearest dollar.)
b. The capital gain (or loss) is $
(Enter a loss as a negative number and round to the nearest dollar.)
c. The total return in dollars is $
(Round to the nearest dollar.)
The total return as a percentage of the original investment is
%. (Enter as a percentage and round to two
decimal places.)
(Bond valuation) You own a bond that pays $120 in annual interest, with a $1,000 par value. It matures in 20 years. Your required rate of return is 10
percent.
a. Calculate the value of the bond.
b. How does the value change if your required rate of return (1) increases to 15 percent or (2) decreases to 6 percent?
c. Explain the implications of your answers in part b as they relate to interest rate risk, premium bonds, and discount bonds.
d. Assume that the bond matures in 3 years instead of 20 years. Recompute your answers in part b.
e. Explain the implications of your answers in part d as they relate to interest rate risk, premium bonds, and discount bonds.
a. If your required rate of return is 10 percent, what is the value of the bond?
$
(Round to the nearest cent.)
Chapter 7 Solutions
Pearson eText Foundations of Finance -- Instant Access (Pearson+)
Ch. 7 - Prob. 1RQCh. 7 - Prob. 2RQCh. 7 - Prob. 3RQCh. 7 - a. How does a bonds par value differ from its...Ch. 7 - Prob. 5RQCh. 7 - Prob. 6RQCh. 7 - Prob. 7RQCh. 7 - Prob. 8RQCh. 7 - Prob. 9RQCh. 7 - Define the expected rate of return to bondholders.
Ch. 7 - (Bond valuation) Bellingham bonds have an annual...Ch. 7 - (Bond valuation) Flora Co.s bonds, maturing in 7...Ch. 7 - (Bond valuation) You own a 20-year, 1,000 par...Ch. 7 - (Bond valuation) Calculate the value of a bond...Ch. 7 - (Bond valuation) At the beginning of the year, you...Ch. 7 - Prob. 6SPCh. 7 - (Bond relationship) Mason, Inc. has two bond...Ch. 7 - Prob. 8SPCh. 7 - (Bond valuation) National Steels 15-year, 1,000...Ch. 7 - (Bond valuation) You own a bond that pays 70 in...Ch. 7 - Prob. 11SPCh. 7 - (Bond valuationzero coupon) The Latham Corporation...Ch. 7 - (Bond valuation) Bank of America has bonds that...Ch. 7 - Prob. 15SPCh. 7 - Prob. 16SPCh. 7 - Prob. 17SPCh. 7 - (Bondholders expected rate of return) You own a...Ch. 7 - (Expected rate of return and current yield) Time...Ch. 7 - (Expected rate of return and current yield)...Ch. 7 - Prob. 21SPCh. 7 - Prob. 22SPCh. 7 - (Current yield) Assume you have a bond with a...Ch. 7 - Prob. 24SPCh. 7 - (Expected rate of return) Assume you own a bond...Ch. 7 - Prob. 26SPCh. 7 - (Bondholders expected rate of return) You...Ch. 7 - Prob. 1MCCh. 7 - Assume that the bonds are selling for the...Ch. 7 - Prob. 3MCCh. 7 - Prob. 4MCCh. 7 - Prob. 5MC
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