Accounting
11.2
a. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return.
PV = CF^n / (1 +i) ^n
PV = CF n / (1 + i)^4
PV = 70 / (1 + .14) ^4
PV = 70 / (1.14) ^4
PV = 70/ 1.14 + 70/ 1.30 + 70/ 1.48 + 70/ 1.69
PV = 61.40 + 53.85 + 47.30 + 41.42 = $203.97
PV of the par value = 1,000
PV = $203.97 + 1,000 = $1203.97
b. Now, suppose Twin Oaks' four-year bond had semiannual coupon payments. What would be its current value? (Assume a 7 percent semiannual required rate of return. However, the actual rate would be slightly less than 7 percent because a semiannual coupon bond is slightly less risky than an annual coupon bond).
PV = 35/ (1+ i/2) ^n*2
PV = 35/ (1 + .7/2) ^4*2
PV = 35/ (1 +.035)^8
PV = 35/ 1.035 ^8
PV= $240.44
PV of the par value = $1,000 + $240.44 = $1,240.44
c. Assume that Twin Oaks' bond had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Again, assume a 7 percent semiannual required rate of return, although the actual rate would probably be greater than 7 percent because of increased price risk).
PV= CFn/ (1 + i/2) ^n*2
PV= 35/ (1+.7/2) ^20*2
PV= 35/ (1.035)^40
PV= $746.26
PV = $1,000 + $746.26
PV of the par value = $1746.26
Thank you for your questions. (A) 2(1.05)/(1.15-1.05) = $21 (B) 2(1.05)/(1.13-1.05) = $26.25 (C) 2(1.07)/(1.15-1.07) =
a. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return.
PV = CF^n / (1 +i) ^n
PV = CF n / (1 + i)^4
PV = 70 / (1 + .14) ^4
PV = 70 / (1.14) ^4
PV = 70/ 1.14 + 70/ 1.30 + 70/ 1.48 + 70/ 1.69
PV = 61.40 + 53.85 + 47.30 + 41.42 = $203.97
PV of the par value = 1,000
PV = $203.97 + 1,000 = $1203.97
b. Now, suppose Twin Oaks' four-year bond had semiannual coupon payments. What would be its current value? (Assume a 7 percent semiannual required rate of return. However, the actual rate would be slightly less than 7 percent because a semiannual coupon bond is slightly less risky than an annual coupon bond).
PV = 35/ (1+ i/2) ^n*2
PV = 35/ (1 + .7/2) ^4*2
PV = 35/ (1 +.035)^8
PV = 35/ 1.035 ^8
PV= $240.44
PV of the par value = $1,000 + $240.44 = $1,240.44
c. Assume that Twin Oaks' bond had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Again, assume a 7 percent semiannual required rate of return, although the actual rate would probably be greater than 7 percent because of increased price risk).
PV= CFn/ (1 + i/2) ^n*2
PV= 35/ (1+.7/2) ^20*2
PV= 35/ (1.035)^40
PV= $746.26
PV = $1,000 + $746.26
PV of the par value = $1746.26
Thank you for your questions. (A) 2(1.05)/(1.15-1.05) = $21 (B) 2(1.05)/(1.13-1.05) = $26.25 (C) 2(1.07)/(1.15-1.07) =