Her are the data on $1000 par value bonds issued by Microsoft, Ford, and Xerox at the end of 2008, Assume you are thinking about buying these bonds as of January 2009. Answer the following questions.
a. Calculate the values of the bonds if your required rates of return are as follows, Microsoft,6 percent; Ford 15 %; Xerox 10% where
To calculate the values of the bonds with the given required rates of return, you will need to use the bond valuation formula. The formula for valuing a bond is:
V = C / (1 + r)^1 + C / (1 + r)^2 + ... + C / (1 + r)^n + M / (1 + r)^n
Where:
V = Value of the bond
C = Coupon payment per period (annual interest payment)
r = Required rate of return (expressed as a decimal)
n = Number of periods (years until maturity)
M = Face value or par value of the bond
For Microsoft bond:
Coupon payment (C) =?
Required rate of return (r) = 6% or 0.06 (as a decimal)
Number of periods (n) = 2009 - 2008 = 1 year
Face value (M) = $1000
Substituting these values into the bond valuation formula:
V = C / (1 + 0.06)^1 + $1000 / (1 + 0.06)^1
= C / 1.06 + $1000 / 1.06
= C / 1.06 + $943.40
Similarly, you can calculate the value of the bonds for Ford and Xerox using the same formula. Here are the calculations for Ford and Xerox:
For Ford bond:
Coupon payment (C) =?
Required rate of return (r) = 15% or 0.15 (as a decimal)
Number of periods (n) = 2009 - 2008 = 1 year
Face value (M) = $1000
V = C / (1 + 0.15)^1 + $1000 / (1 + 0.15)^1
= C / 1.15 + $869.57
For Xerox bond:
Coupon payment (C) =?
Required rate of return (r) = 10% or 0.10 (as a decimal)
Number of periods (n) = 2009 - 2008 = 1 year
Face value (M) = $1000
V = C / (1 + 0.10)^1 + $1000 / (1 + 0.10)^1
= C / 1.10 + $909.09
To calculate the values of the bonds, you will need to know the coupon payment for each bond. Once you have this information, you can substitute the values into the formulas to find the bond values.