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I can't figure this out, please help.
My company has two bond issues outstanding. Both bonds pay 100 annual interest plus 1000 at maturity. Bond x has a maturity of 15 years, and Bond Y a maturity of 1 year. What will the value of each of these bonds when the going rate of interest is 5%, 8%, and 12%? Assume that there is only one more interest payment to be made on bond y.
I guess nobody else understands this either. My entire class is lost and our text is no help at all. Does anyone know of any online help guides that could maybe help me with this question? I seriously need some advice. I only have three weeks in the class left. I just found out that we were supposed to have taken accounting before taking financial management but it's too late now. Help please.Quote:
Originally Posted by ivory5130
it may be too late to answer this question for your benefit, but for others who might want the answer, here's mine:
It seems that your bond has a value of 1,000 ("plus 1000 at maturity") - the face value to be paid at maturity (assuming that it is to be repaid at par); and it has a stated interest rate of 10% ( "pay 100 annual interest" - 1000 x 10%). Therefore:
Bond X
Face Value (FV) - 1,000
Interest Rate (I) - 10%
Interest Payment term (f)- Annual
Term (t) - 15 years
Bond Y
Face Value - 1,000
Interest Rate - 10%
Interest Payment term - Semiannualy
Term - 1 years
Now the question is what are the present values of the bonds given the Effective Interest Rates (EIR) of 5%, 8% and 12%.
To compute for the present value use this formula:
PV(bond) = PV (interest) + PV (principal)
PV (interest) = (FV * I) * (1-(1/(1+EIR)^n)/EIR
PV (principal) = FV * (1/(1+EIR)^n)
Notes: n is the frequency of payment which is in this case for Bond X: 15 x 1 = 30 ( x 1 because it is annual, x 2 if paid semiannually) and for Bond Y: 1x1 = 1
So the answers would be:
Bond X
a) 5%: 1,518.98
b) 8%: 1,171.19
c) 12%: 863.78
Bond Y
a) 5%: 1,047.62
b) 8%: 1,018.52
c) 12%: 982.14
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