Question

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?

Answer 1

	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