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October 5th, 2008, 08:31 PM   #1
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calculate bonds value. only for smart kids

Difficult question. Only for smart kids!

Company has a level coupon bond with 9% coupon rate; interest is paid annually. The bond has 20 years to maturity and a face value of $ 1000. Similar bonds currently yield 7%. By prior agreement the company will skip the coupon interest payment in year 8,9, and 10. These payments will be repaid without interest at maturity. What is the bonds value?
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October 5th, 2008, 08:44 PM   #2
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Re: calculate bonds value. only for smart kids

I've never taken financial mathematics, but comparing it to the straight-up 7% bond I'd say it's worth $1064.79. What do you get and why?
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October 6th, 2008, 11:52 AM   #3
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Re: calculate bonds value. only for smart kids

I agree with CRGreathouse.



This is a difficult question?
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October 6th, 2008, 06:57 PM   #4
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Re: calculate bonds value. only for smart kids

answer must be 1134,56
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October 6th, 2008, 07:37 PM   #5
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Re: calculate bonds value. only for smart kids

without skipping interest answer will be like this:

N = 20
FV= 1000
i = 7
pmt = 90
pv = ? -> 1211,88
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October 7th, 2008, 09:36 AM   #6
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Re: calculate bonds value. only for smart kids

Quote:
Originally Posted by jbbusiness
without skipping interest answer will be like this:

N = 20
FV= 1000
i = 7
pmt = 90
pv = ? -> 1211,88
Agree with you on that one.
Quote:
Originally Posted by jbbusiness
answer must be 1134,56
At the risk of being repetitive, I agree with CRGreathouse.
If youíre familiar with annuity formulas and notations, it should be clear to you that the value of your first problem is equal to the present value of the final redemption payment (face value) plus the present value of 17 coupon payments (the shorthand notation of which Iíve already shown) at the current yield rate of 7%.
Now that Iíve shown you a portion of my hand, I believe itís time for you to show us some of yours by justifying the calculations behind your ď[color=#FF0000]1134,56[/color]Ē.
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October 7th, 2008, 10:44 AM   #7
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Re: calculate bonds value. only for smart kids

Quote:
Originally Posted by jbbusiness
answer must be 1134,56
That's almost as much ($1137.11) as if the skipped coupons were in the last three years. How did you get that figure?

Regardless, I'm moving this thread to Mathematics & Economics. Little as economics has to do with financial mathematics, number theory has less yet to do with it.
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