50 38600 b0 100050 table use substituting the values

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Unformatted text preview: ar, January 1, 2004, issue paying annual interest; required return 10%) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,000 $ 614.50 386.00 B0 = $1,000.50 Table Use Substituting the values noted above into Equation 6.7a yields B0 $100 (PVIFA10%,10yrs) $1,000 (PVIF10%,10yrs) $100 (6.145) $1,000 (0.386) $614.50 $386.00 $1,000.50 The bond therefore has a value of approximately $1,000.13 12. The payment of annual rather than semiannual bond interest is assumed throughout the following discussion. This assumption simplifies the calculations involved, while maintaining the conceptual accuracy of the valuation procedures presented. 13. Note that a slight rounding error ($0.50) results here from the use of the table factors, which are rounded to the nearest thousandth. 286 PART 2 Input 10 Important Financial Concepts Function N 10 I 100 PMT Calculator Use Using the Mills Company’s inputs shown at the left, you should find the bond value to be exactly $1,000. Note that the calculated bond value is equal to its par value; this will always be the case when the required return is equal to the coupon interest rate.14 FV 1000 CPT Bond Value Behavior PV Solution 1000 In practice, the value of a bond in the marketplace is rarely equal to its par value. In bond quotations (see Figure 6.4), the closing prices of bonds often differ from their par values of 100 (100 percent of par). Some bonds are valued below par (quoted below 100), and others are valued above par (quoted above 100). A variety of forces in the economy, as well as the passage of time, tend to affect value. Although these external forces are in no way controlled by bond issuers or investors, it is useful to understand the impact that required return and time to maturity have on bond value. Required Returns and Bond Values discount The amount by which a bond sells at a value that is less than its par value. premium The amount by which a bond sells at a value that is...
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