(Bond valuation) You are examining three bonds with a par value of $1,000 (you receive $1,000 at maturity) and are concerned with what would happen to their market value if interest rates (or the market discount rate) changed. The three bonds are Bond A-a bond with 4 years left to maturity that has an annual coupon interest rate of 8 percent, but the interest is paid semiannually. Bond B-a bond with 11 years left to maturity that has an annual coupon interest rate of 8 percent, but the interest is paid semiannually. Bond C-a bond with 19 years left to maturity that has an annual coupon interest rate of 8 percent, but the interest is paid semiannually. What would be the value of these bonds if the market discount rate were a. 8 percent per year compounded semiannually? b. 6 percent per year compounded semiannually? c. 17 percent per year compounded semiannually? d. What observations can you make about these results? a. If the market discount rate were 8 percent per year compounded semiannually, the value of Bond A is $ 1,000.00 (Round to the nearest cent.) If the market discount rate were 8 percent per year compounded semiannually, the value of Bond B is $ 1,000.00 (Round to the nearest cent.) If the market discount rate were 8 percent per year compounded semiannually, the value of Bond C is $ 1,000.00. (Round to the nearest cent.) b. If the market discount rate were 6 percent per year compounded semiannually, the value of Bond A is S. (Round to the nearest cent.)
(Bond valuation) You are examining three bonds with a par value of $1,000 (you receive $1,000 at maturity) and are concerned with what would happen to their market value if interest rates (or the market discount rate) changed. The three bonds are Bond A-a bond with 4 years left to maturity that has an annual coupon interest rate of 8 percent, but the interest is paid semiannually. Bond B-a bond with 11 years left to maturity that has an annual coupon interest rate of 8 percent, but the interest is paid semiannually. Bond C-a bond with 19 years left to maturity that has an annual coupon interest rate of 8 percent, but the interest is paid semiannually. What would be the value of these bonds if the market discount rate were a. 8 percent per year compounded semiannually? b. 6 percent per year compounded semiannually? c. 17 percent per year compounded semiannually? d. What observations can you make about these results? a. If the market discount rate were 8 percent per year compounded semiannually, the value of Bond A is $ 1,000.00 (Round to the nearest cent.) If the market discount rate were 8 percent per year compounded semiannually, the value of Bond B is $ 1,000.00 (Round to the nearest cent.) If the market discount rate were 8 percent per year compounded semiannually, the value of Bond C is $ 1,000.00. (Round to the nearest cent.) b. If the market discount rate were 6 percent per year compounded semiannually, the value of Bond A is S. (Round to the nearest cent.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Bond Valuation Analysis**
You are examining three bonds, each with a par value of $1,000 (you receive $1,000 at maturity) and are concerned with how their market value would change if interest rates (or the market discount rate) changed. The three bonds are:
- **Bond A:** A bond with 4 years left to maturity that has an annual coupon interest rate of 8 percent, with interest paid semiannually.
- **Bond B:** A bond with 11 years left to maturity that has an annual coupon interest rate of 8 percent, with interest paid semiannually.
- **Bond C:** A bond with 19 years left to maturity that has an annual coupon interest rate of 8 percent, with interest paid semiannually.
**Question:**
What would be the value of these bonds if the market discount rate were:
- a. 8 percent per year compounded semiannually?
- b. 6 percent per year compounded semiannually?
- c. 17 percent per year compounded semiannually?
- d. What observations can you make about these results?
**Results:**
- **a.** If the market discount rate were 8 percent per year compounded semiannually:
- The value of Bond A is $1,000.00.
- The value of Bond B is $1,000.00.
- The value of Bond C is $1,000.00.
*(All values rounded to the nearest cent.)*
- **b.** If the market discount rate were 6 percent per year compounded semiannually:
- The value of Bond A needs to be calculated. ☐ (Round to the nearest cent.)
- **Observations:**
- When the market discount rate matches the coupon rate (8 percent), the bond's market value equals its par value.
- Changes in the discount rate affect the market value of bonds differently, depending on their maturity and coupon rates.
**Note:** Further calculations are needed to determine the values of bonds under different discount rates, particularly for the scenario with a 6 percent discount rate.
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