If you know the par value of bonds, the contract rate, and the market rate, how do you compute the bonds’ price?

Expert Solution

Step-by-Step Solution

Step 1: Definition of bonds

The bonds are a type of the long-term debt source for the companies. These are issued by the companies to raise large amount of money. On the bonds the companies has to pay interest in the regular intervals.

Step 2: Determination of Bond Price

The issue price of the bonds is calculated by determining the present value of the bonds. In the calculation of the present value, the semi-annual compounding period is used by the company for cash payments and discounts. The present value of the bonds determined by using the present value factor. To calculate the bond price we multiply the PV factor with the par value of bonds. After this we add the interest payment to calculate the final amount of the bond price.

In this when the contract price of the bonds is less than the market price it means that bonds are issued at a discount.

If the contract price is greater than the market rate it means the bonds are issued at a premium.

When the contract rate and the market rate are equal it means bonds are issued at par.

It is calculated by using the present value of bonds.

Sahil Dangi answered 2 years ago

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