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Unformatted text preview: anding a $1,000 par-value bond
with an 8% coupon interest rate. The bond has 12 years remaining to its maturity date.
a. If interest is paid annually, find the value of the bond when the required
return is (1) 7%, (2) 8%, and (3) 10%?
b. Indicate for each case in part a whether the bond is selling at a discount, at a
premium, or at its par value.
c. Using the 10% required return, find the bond’s value when interest is paid
semiannually. LG6 ST 6–2 Yield to maturity Elliot Enterprises’ bonds currently sell for $1,150, have an
11% coupon interest rate and a $1,000 par value, pay interest annually, and
have 18 years to maturity.
a. Calculate the bonds’ yield to maturity (YTM).
b. Compare the YTM calculated in part a to the bonds’ coupon interest rate,
and use a comparison of the bonds’ current price and their par value to
explain this difference. CHAPTER 6 TABLE 6.7 Interest Rates and Bond Valuation 295 Summary of Key Valuation Definitions
and Formulas for Any Asset and for Bonds Definitions of variables
V0 bond value
cash flow expected at the end of year t
annual interest on a bond
appropriate required return (discount rate)
required return on a bond
par, or face, value of a bond
relevant time period, or number of years to maturity
value of the asset at time zero Valuation formulas
Value of any asset:
(1 k)2 (PVIFk,1)] ...
(PVIFk,2)] [Eq. 6.5]
... [CFn (PVIFk,n )] [Eq. 6.6] Bond value:
n B0 I
t1 I (1 1
kd)t (PVIFAkd ,n) M
M (1 1
kd)n (PVIFkd ,n) [Eq. 6.7]
[Eq. 6.7a] PROBLEMS
LG1 6–1 Interest rate fundamentals: The real rate of return Carl Foster, a trainee at an
investment banking firm, is trying to get an idea of what real rate of return
investors are expecting in today’s marketplace. He has looked up the rate paid on
3-month U.S. Treasury bills and found it to be 5.5%. He has decided to use the
rate of change in the Consumer Price Index as a proxy for the inflationary expectations of investors. That annualized rate now stands at 3%. On t...
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