A if interest is paid annually find the value of the

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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 B0 CFt I k kd M n 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: V0 CF1 (1 k)1 [CF1 CF2 (1 k)2 (PVIFk,1)] ... [CF2 CFn (1 k)n (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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