Spartak Moscow Sdn Bhd owns a bond that pays RM400 in annual interest with a RM2000...

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Accounting

Spartak Moscow Sdn Bhd owns a bond that pays RM400 in annualinterest with a RM2000 par
value. It matures in 20 years. The company requires rate of returnis 14 percent.
(a) Calculate the value of the bond.

(b) How does the value change of your required rate of returnincreases to 19 percent or
decrease to 10 percent?
(c) Explain the implications of your answers in part (b) ofquestion 4 as they relate to interest
rate risk, premium bonds, and discount bonds.

(d) Assume the bond matures in 15 years instead of 20 years.Re-compute your answer in part
(b) of question 4.

Answer & Explanation Solved by verified expert

3.8 Ratings (334 Votes)

aStatement showing Price or Intrinsic Value since there is annual payment so coupon payment is 400 yield is 14 and number of years 20 Particulars Time PVf 14 Amount PV Cash Flows Interest 100 08772 40000 35088 Cash Flows Interest 200 07695 40000 30779 Cash Flows Interest 300 06750 40000 26999 Cash Flows Interest 400 05921 40000 23683 Cash Flows Interest 500 05194 40000 20775 Cash Flows Interest 600 04556 40000 18223 Cash Flows Interest 700 03996 40000 15985 Cash Flows Interest 800 03506 40000 14022 Cash Flows Interest 900 03075 40000 12300 Cash Flows Interest 1000 02697 40000 10790 Cash Flows Interest 1100 02366 40000 9465 Cash Flows Interest 1200 02076 40000 8302 Cash Flows Interest 1300 01821 40000 7283 Cash Flows Interest 1400 01597 40000 6388 Cash Flows Interest 1500 01401 40000 5604 Cash Flows Interest 1600 01229 40000 4916 Cash Flows Interest 1700 01078 40000 4312 Cash Flows Interest 1800 00946 40000 3782 Cash Flows Interest 1900 00829 40000 3318 Cash Flows Interest 2000 00728 40000 2910 Cash flows Maturity Amount 2000 00728 200000 14560 Intrinsic Value of Bond or Current Bond See Answer

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