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Bond Valuation Calculation Exercise

# Bond Valuation Calculation Exercise - Bond Valuation...

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Bond Valuation Calculation Exercise—Using ST 6-1, pg. 264 We discount a bond’s interest stream and its principal repayment (as those are the only two types of cash flows coming to us as investors) when doing a “second opinion,” “theoretical price,” or value estimate for a bond. Info given in problem about Lahey’s bonds: \$1,000 par value (which is always the FV) 8% coupon rate -> \$80 (moving decimal one place to the right), which will be PMT because it occurs each year. This assumes annual compounding. Bond has 12 years until maturity, from today, so 12 is N. a. (1) the required return is 7% a year – this is I/YR, the discount rate. [ ] C ALL 1 [ ] P/YR 80 [PMT] 1000 [FV] 12 [N] 7 [I/YR] Press [PV] -> -1,079,43 or \$1,079.43 This is what we’d be willing to pay for the bond today. Is this a discount or premium price? Why a premium price resulting here? Because the discount rate < the coupon rate. a. (3) 10% discount rate: Change the I/YR to 10, press [PV]-> \$863.73. Discount or premium? This is because the discount rate is now > the coupon rate. Part c. (3) 10% discount rate: 2 [ ] P/Yr 12[N] [ ] [N]

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