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    Bond Prices

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    Assume the following information for an existing bond that provides annual coupon payments:
    Par value = $1,000
    Coupon rate = 11%
    Maturity = 4 years
    Required rate of return by investors = 11%

    a. What is the present value of the bond?
    b. If the required rate of return by investors were 14% instead of 11%, what would be the present value of the bond?
    c. If the required rate of return by investors were 9%, what would be the present value of the bond?

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    Solution Preview

    Assume the following information for an existing bond that provides annual coupon payments:
    Par value = $1,000
    Coupon rate = 11%
    Maturity = 4 years
    Required rate of return by investors = 11%

    a. What is the present value of the bond?

    If the coupon rate = required rate of return, the present value (price) of the bond= par value = $ 1000

    Calculating Present Value of bond
    To calculate the present value of the bond we need to calculate / read from tables the values of
    PVIF= Present Value Interest Factor
    PVIFA= Present Value Interest Factor for an Annuity
    Present Value of bond= PVIF * Maturity value + PVIFA * interest payment per period

    PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
    PVIF( n, r%)= =1/(1+r%)^n

    Data
    No of years to ...

    Solution Summary

    Bond price at different required rates of return have been computed.

    $2.19

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