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Bond Valuation

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IBM 8% due in 5 years
Assume $1,000 Par or face amount
Assume exactly 5 years to maturity
Cash Flows:
0 $0
1 $40
2 $40
3 $40
4 $40
5 $40
6 $40
7 $40
8 $40
9 $40
10 $1,040

Current Market Interest rate for IBM 7.25%
Price of the bond (today) $1,030.99
What is the value of the IBM bond, given above, if market rates instantanously went to 8.5%?
Compare the IBM bond aboe versus a "zero coupon" bond with the same face value and same YTM. IF rates for both bonds went from the current rate to 5.8%, which would have a higher price change?
What is the rate of return earned for holding the zero coupon bond for 10 years?

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Solution Preview

bond is semi-annually
n=10
pmt=40
annual rate is 8%

i=7.25/2
3.625

PV=1030.99

i=8.25/2
4.125

1.
using financial calculator

n=10
pmt=40
i=8.25/2 ...

Solution Summary

The expert examines bond valuations of maturity for cash flows.

$2.19