Principles of Managerial Finance

CHAPTER 6 Interest Rates and Bond Valuation 287

887.00

10 N

I

FV

CPT

PV

PMT

12

100

1000

Solution

Input Function

TABLE 6.6 Bond Values for Various

Required Returns (Mills

Company’s 10% Coupon

Interest Rate, 10-Year

Maturity, $1,000 Par,

January 1, 2004, Issue

Paying Annual Interest)

Required return, kd Bond value, B 0 Status

12% $ 887.00 Discount

10 1,000.00 Par value

8 1,134.00 Premium

1,400

1,300

1,200

1,100

1,000

900

800

700

0 2 4 6 8 10 12 14 16

Required Return, kd (%)

887

1,134

Par

Discount

Premium

Market Value of Bond,

B^0

($)

FIGURE 6.5

Bond Values and
Required Returns
Bond values and required
returns (Mills Company’s
10% coupon interest rate,
10-year maturity, $1,000 par,
January 1, 2004, issue paying
annual interest)

Calculator Use Using the inputs shown at the left for the two

different required returns, you will find the value of the bond

to be below or above par. At a 12% required return, the bond

would sell at a discount of $113.00 ($1,000 par value

$887.00 value). At the 8% required return, the bond would sell

for a premiumof about $134.00 ($1,134.00 value$1,000

par value). The results of this and earlier calculations for Mills

Company’s bond values are summarized in Table 6.6 and

graphically depicted in Figure 6.5. The inverse relationship

between bond value and required return is clearly shown in the

figure.

1134.20

10 N

I

FV

CPT

PV

PMT

8

100

1000

Solution

Input Function