Chapter 6 table 66 interest rates and bond valuation

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Unformatted text preview: nce, throughout this book, bond values will always be assumed to be calculated at the beginning of the interest period, thereby avoiding the need to consider accrued interest. CHAPTER 6 TABLE 6.6 Interest Rates and Bond Valuation Bond Values for Various Required Returns (Mills Company’s 10% Coupon Interest Rate, 10-Year Maturity, $1,000 Par, January 1, 2004, Issue Paying Annual Interest) Required return, kd Bond value, B0 $ 887.00 12% Status Discount 10 Function N Input 10 Function N 12 I 8 I 100 PMT 100 PMT 1000 FV 1000 FV CPT CPT PV PV Solution 887.00 Solution 1134.20 1,000.00 Par value 8 Input 10 1,134.00 Premium Calculator Use Using the inputs shown at the left for the two different required returns, you will find the value of the bond to be below or above par. At a 12% required return, the bond would sell at a discount of $113.00 ($1,000 par value $887.00 value). At the 8% required return, the bond would sell for a premium of about $134.00 ($1,134.00 value $1,000 par value). The results of this and earlier calculations for Mills Company’s bond values are summarized in Table 6.6 and graphically depicted in Figure 6.5. The inverse relationship between bond value and required return is clearly shown in the figure. FIGURE 6.5 1,400 Market Value of Bond, B0 ($) Bond Values and Required Returns Bond values and required returns (Mills Company’s 10% coupon interest rate, 10-year maturity, $1,000 par, January 1, 2004, issue paying annual interest) 1,300 1,200 Premium Par Discount 287 1,134 1,100 1,000 900 887 800 700 0 2 4 6 8 10 12 Required Return, kd (%) 14 16 288 PART 2 Important Financial Concepts Time to Maturity and Bond Values Whenever the required return is different from the coupon interest rate, the amount of time to maturity affects bond value. An additional factor is whether required returns are constant or changing over the life of the bond. Constant Required Returns When the required return is different from the coupon interest rate and is assumed to be constant u...
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