valuation of financial secuities
3 easy problems on valuation of financial securities, they are attachd.
first problem: (bond value and time) plot findings on a chart with explanation.
second problem: (bond price movements) graphing required.
third problem: (Share/business valuation).
LAB #1: Valuation of Financial Securities
Pecos Manufacturing issued a 20-year bond with a 6.6% coupon rate, five years ago. The
coupons are paid serfiiannually. The required return is currently 19¢3% where the company is
certain it will remain until the bond matures in 15 years. WV”
a. Assuming that the required return does remain at 10.2% until maturity, find the value of
each $1000 of par value of bond with ( 1) 15 years, (2) 12 years, (3) 9 years. (4) 6 years,
(5) 3 years, and (6) 1 year to maturity.
b. Plot your findings on a chart where time to maturity is the x axis and the market value of
bond is the y axis.
c. All else remaining the same, when the required return differs from the coupon rate and is
assumed to be constant to maturity, what happens to the bond value as time moves
toward maturity? Explain in light of the graph in b.
Problem 2 (Bond Price Movements)
a. Bond X is a premium bond making annual payments. The bond pays an 8% coupon,
has a YTM of 6%. and has 13 years to maturity. Bond Y is a discount bond making
annual payments. This bond pays a 6% coupon. has a YTM of 8%, and also has 13
years to maturity. If interest rates remain unchanged. what do you expect the price of
these bonds to be one year from now? In three years? In eight years? In 12 years? In
13 years? What is going on here? Illustrate your answers by graphing bond prices
versus time to maturity.