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Present Value and PV of Bonds

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Media Bias, Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 35-year life when issued and the annual interest payment was then 10 percent. This return was in line with the required returns by bondholders at that point in time as described below:

Real rate of return 2%
Inflation premium 4
Risk premium 4
Total return 10%

Assume that 10 years later, due to good publicity, the risk premium is now 2 percent and is appropriately reflecting in the required return (or yield to maturity) of the bonds. The bonds have 25 years remaining until maturity. Compute the new price of the bond.

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Solution Summary

The solution shows a step by step calculation of the new price of the bonds when interest rate changes, including explanation.

Solution Preview

Start out by listing the facts of the problem.

Fv = $1000
N or time till maturity = 25 years
i = 8% [Real rate of return (2%) + Inflation premium (4%) + Risk premium (2%)]

We are solving for price or PV of bond. There are ...

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