Question

I tried solving this problem and I dont understand how to put this together. Please

Here are data on $1,000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following​ questions:
a. Assuming the interest is paid​ annually, calculate the values of the bonds if the required rates of return are as​ follows: Microsoft, 6 percent; GE​ Capital, 9.5 percent; and Morgan​ Stanley, 10 percent; where:
MICROSOFT GE CAPITAL MORGAN STANLEY
Coupon interest rate 4.25% 3.25% 3.75%
Years to maturity 26 12 8
a. If the required rate of return on the Microsoft bond is 6 percent, what is the value of the​ bond?
b. The bonds are selling for the following​ amounts:
Microsoft $846
GE Capital $475
Morgan Stanley $594
What are the expected rates of return for each​ bond?
c. How would the value of the bonds change if​ (1) the required rate of return
​(rb​) increased 2 percentage points or​ (2) decreased 2 percentage​ points?
d. Explain the implications of the answers in part c in terms of interest rate​ risk, premium​ bonds, and discount bonds
e. Should one buy the​ bonds? Explain.

Answer 1

To calculate the value of a bond, use the present value formula, which takes into account the coupon payment, required rate of return, number of years to maturity, and face value of the bond. For example, the value of the Microsoft bond with a 6 percent required rate of return is $708.91.

Step-by-step explanation:

To calculate the value of a bond, you need to use the present value formula. The formula is:

Value = (Coupon payment / required rate of return) * (1 - (1 / (1 + required rate of return)^N)) + (Face value / (1 + required rate of return)^N)

where Coupon payment is the annual interest payment, required rate of return is the discount rate, N is the number of years to maturity, and Face value is the par value of the bond.

For example, to calculate the value of the Microsoft bond with a 6 percent required rate of return:

Value = (0.0425 * 1000) / 0.06 * (1-(1/(1+0.06)^26)) + 1000 / (1+0.06)^26

So the value of the Microsoft bond is $708.91.