Chapter 11: The Valuation of Debt Finance, the Macaulay Duration and the Modified Duration

Interest is paid annually and the next payment is due in one year. Ignore investor tax. Round each annual present value to two decimal places before summing.

(a) Bond A. A company has 8% bonds in issue, redeemable in 5 years at a premium of 10%. Investors require a return of 10%. Calculate the market value per $100 nominal.

(b) Bond B. Another bond pays the same coupon and redemption premium, but is redeemable in 10 years and is quoted at $91.61 per $100 nominal. Calculate its gross redemption yield, using the required return for bond A as the first trial.

(c) A rise in yields. For both bonds, calculate the new market values and the percentage falls if the required return rises to 15%.

Published present-value factors for consecutive annual dates, starting at year 1: at the current yield: 0.909, 0.826, 0.751, 0.683, 0.621, 0.564, 0.513, 0.467, 0.424, 0.386. At the new yield: 0.870, 0.756, 0.658, 0.572, 0.497, 0.432, 0.376, 0.327, 0.284, 0.247.