(SOLVED) A bond with a $1,000 face value and a 10% annual coupon rate matures in 15 years.

Question

A bond with a $1,000 face value and a 10% annual coupon rate matures in 15 years.

i. Determine the value of the bond to a friend of yours with a required rate of return of 13 percent

ii. A zero-coupon bond with similar risk is selling for $150. The bond has a face value of $1,000 and matures in 15 years.

A friend of yours asks you which bond he should invest in, the zero coupon bond or the bond in part (1).

Which bond do you recommend, and why? Assume the market price of the bond in part (1) is $820.

Expert Solution Preview

i)

Price of bond I at required rate = PV(0.13,15,-100,-1000,0) {Using Excel formula}

= $806.13

Difference between marked price and price of bond I at required rate =