Assume venture healthcare sold bonds that have a ten year maturity a 12 percent coupon rate with annual payments, and a $1,000 par value.
A. Suppose that two years after the bonds were issued, the required interest rate fell to 7 percent. What would be the bonds value?
To calculate the value of the bond two years after it was issued when the required interest rate fell to 7 percent, we need to use the bond valuation formula.
The bond valuation formula is:
Bond Value = (C / r) * (1 - (1 / (1 + r)^n)) + (F / (1 + r)^n)
Where:
C = coupon payment per period
r = required interest rate per period
n = number of periods
F = face value of the bond
Given information:
C = 12% * $1,000 = $120 (coupon payment per year)
r = 7% (required interest rate after two years)
n = 8 (remaining years until maturity)
F = $1,000 (face value of the bond)
Using the formula, we can calculate the bond value:
Bond Value = ($120 / 0.07) * (1 - (1 / (1 + 0.07)^8)) + ($1,000 / (1 + 0.07)^8)
Now, we can plug in the values and calculate the bond value:
Bond Value = ($120 / 0.07) * (1 - (1 / 1.07^8)) + ($1,000 / 1.07^8)
After performing the calculations, the bond value two years later can be obtained.