Question

An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

rev: 08_02_2017_QC_CS-94572

Multiple Choice

$1,686.

$1,000.

$893.

$828.

Answer 1

• All working forms part of the answer
• Workings

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

	Applicable rate
Market Rate	5.0%
Coupon Rate	4.0% [40/1000]

Face Value	$                 1,000.00
Term (in years)	20
Total no. of interest payments	40

• Market Value of Bond = $ 828 calculated below

	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$                     1,000.00	at	5.0%	Interest rate for	40	term payments
PV of $1	0.142045682
PV of	$                     1,000.00	=	$                     1,000.00	x	0.142045682	=	$                142.05	A
Interest payable per term	at	4.0%	on	$               1,000.00
Interest payable per term	$                           40.00
PVAF of 1$	for	5.0%	Interest rate for	40	term payments
PVAF of 1$	17.15908635
PV of Interest payments	=	$                       40.00	x	17.15908635	=		$                686.36	B
				Bond Value (A+B)			$                828.41	= Answer

• Correct Answer = Option #4: $ 828