Question

Bionca buys a 14-year bond with semiannual coupons of $27 each and a redemption value of $1310. She bought the bond to yield 6% compounded semiannually. Determine the book value of this bond 8 years after issue of the bond.

Answer 1

Book value of bond = Present value of future cash-flows

Reqired rate of return = 6% p.a. (this will be 3% [6%/2] as the coupon is received semi annually.

Time = 6 years [ this will be 12 years for 3% as the coupon is paid semi-annually)

As the bond is issued for14 years and 8 years has already passed. This remaining life will be 6 years.

Time (n)	Year	Coupon	Redemption	Discounting factor @3% k=1/(1+3%)^n	Present value
		A	B	C	(A + B) X C
1	8.5	27	-	0.97	26.21
2	9.0	27	-	0.94	25.45
3	9.5	27	-	0.92	24.71
4	10.0	27	-	0.89	23.99
5	10.5	27	-	0.86	23.29
6	11.0	27	-	0.84	22.61
7	11.5	27	-	0.81	21.95
8	12.0	27	-	0.79	21.31
9	12.5	27	-	0.77	20.69
10	13.0	27	-	0.74	20.09
11	13.5	27	-	0.72	19.51
12	14.0	27	-	0.70	18.94
12	14.0	-	1,310	0.70	918.81
				Price of bond	1,187.57