Answer to Question #144356 in Financial Math for Eric

Question

5. use NPV and internal rate of return criteria to advise the company on whether the machine should be acquired or rejected.
b) Thelma holds two bonds; a 30year coupon bond with a face value of $30million. Suppose interest rate increased from 8% to 9%, which bond will have the greater decline in price?

Answer 1

BP = $\frac{C\times(1-(1+r)^{-n}}{i} + M(1+r)^{-n}$

C = F/n = 30/30 = $1million

i. When r = 8%

BP = $\frac{1(1-(1+8\%)^{-30}}{0.08} + 30(1+0.08)^{-30}$

BP = 11.25778 + 2.98132 = $ 14.2391

ii. When r=9%

BP = $\frac{1(1-(1+9\%)^{-30})}{0.09} + 30(1+0.09)^{-30}$

BP = 10.27365 + 2.261134 = $ 12.53479

The bond with a great decline in price is the bond with an interest rate of 9% (bond price = $ 12.53479).