BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section
BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.

  1. a. What will the value of each bond be if the going interest rate is 5%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on Bond L.
  2. b. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?

(a)

Summary Introduction

To identify: Current market price of bond.

Bond Valuation:

Bond valuation refers to the evaluation of bonds value at any point of time, which can be used for decision making. Valuation of bond is done for comparison and analysis.

Explanation

Given,

Interest rate is 10% or 0.1.

Yield to maturity (YTM) is 5%,8% and 12%.

Par value of bond is $1,000.

Maturity is after 15 years for bond L.

Maturity is after 1 year for bond S.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd<

(b)

Summary Introduction

To explain: Reasons for variation in price of longer-term bond and shorter-term bonds due to change in interest rate.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

REQUIRED RATE OF RETURN Suppose rRF = 9%, rM = 14% and bi = 13. a. What is ri, the required rate of return on S...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Explain the deposit requirement for federal unemployment tax.

College Accounting (Book Only): A Career Approach

What is the purpose of endorsing a check?

College Accounting (Book Only): A Career Approach

Use a production possibilities frontier to describe the idea of efficiency.

Principles of Macroeconomics (MindTap Course List)