The Garraty company has two bond issues outstanding. Both bonds pa $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years and Bond S a maturity of 1 year. A). What will be the value of each of these bonds when the going rate of inters is (1) 5 percent, (2) 8 percent and (3) 12 percent? Assume that there is only one more interest payment to be made on Bond S.
I don't need the answers, I just want to know the process in how to solve. Thank you.
hoy ayaw pag-nilaug sa answer kay dli ka madato ana.
To calculate the value of each bond at different interest rates, you need to use the present value formula. The present value formula allows you to calculate the current worth of future cash flows. The formula is:
PV = C / (1 + r)^n
Where:
PV = Present Value
C = Cash flow (in this case, $100 annual interest + $1,000 at maturity)
r = Interest rate
n = Number of periods
Let's go step-by-step to solve it for each bond and interest rate:
1. Bond L (Maturity: 15 years)
a) At a 5% interest rate:
- Use n = 15 (years)
- Calculate the present value of the $100 annual interest payments for 15 years and the $1,000 at maturity: PV = [($100 / (1 + 0.05)^1) + ($100 / (1 + 0.05)^2) + ... + ($100 / (1 + 0.05)^15)] + ($1,000 / (1 + 0.05)^15)
b) Repeat the above step for 8% and 12% interest rates.
2. Bond S (Maturity: 1 year)
a) At a 5% interest rate:
- Use n = 1 (year, as there is only one more interest payment left)
- Calculate the present value of the $100 annual interest payment and the $1,000 at maturity: PV = ($100 / (1 + 0.05)^1) + ($1,000 / (1 + 0.05)^1)
b) Repeat the above step for 8% and 12% interest rates.
By following this process, you can calculate the present value of each bond given the different interest rates.