Assume that BMT's 10-year bonds pay $50 of interest every 6 months rather than $100 at...

Assume that BMT's 10-year bonds pay $50 of interest every 6 months rather than $100 at the end of each year and the going (nominal) rate is r_d = 5%. What is the bond's value?

Expert Solution


CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY

Step 1 : Calculation of Semi Annual Coupon Payments
Par value of the bond issued is =			$1,000
Semi Annual Coupon Amount			$50.00

Step 2: Calculate number of years to Maturity
Number of years to maturity = 10 years
Interest is paid semi annyally so total period = 10 Years * 2 = 20 Periods

Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds

Ongoing Market rate of interest or Yield to Maturity = 5%
Bonds interest is paid semi annualy means so discounting factor = 5 % /2= 2.5 %

PVF = 1 / Discount rate = 1/ 1.025
Result of above will again divide by 1.025 , repeat this lat period

Period	Interest	Amount (In Million)	PVF @ 2.5%	PresentValue
1	Interest	$50.00	0.9756	$48.78
2	Interest	$50.00	0.9518	$47.59
3	Interest	$50.00	0.9286	$46.43
4	Interest	$50.00	0.9060	$45.30
5	Interest	$50.00	0.8839	$44.19
6	Interest	$50.00	0.8623	$43.11
7	Interest	$50.00	0.8413	$42.06
8	Interest	$50.00	0.8207	$41.04
9	Interest	$50.00	0.8007	$40.04
10	Interest	$50.00	0.7812	$39.06
11	Interest	$50.00	0.7621	$38.11
12	Interest	$50.00	0.7436	$37.18
13	Interest	$50.00	0.7254	$36.27
14	Interest	$50.00	0.7077	$35.39
15	Interest	$50.00	0.6905	$34.52
16	Interest	$50.00	0.6736	$33.68
17	Interest	$50.00	0.6572	$32.86
18	Interest	$50.00	0.6412	$32.06
19	Interest	$50.00	0.6255	$31.28
20	Interest	$50.00	0.6103	$30.51
21	Bond Principal Value	$1,000.00	0.6103	$610.27
	Total			$1,389.73

	Bond' s Value			$1,389.73


	Answer =	$1,389.73

jeff jeffy answered 2 years ago

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