Question

Question 5 Fortescue Ltd is offering bonds with a coupon rate of 8% p.a., paid semi-annually. The par value of each bond is $1,000 and has eight (8) years to maturity. The yield to maturity is 9%. What is the value of the bond?

Answer 1

	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
	Step 1 : Calculation of Annual Coupon Payments
	Par value of the bond issued is   =			$1,000
	Annual Coupon %			8.00%
	Annual Coupon Amount			$80
	Semi Annual Coupon Amount			$40
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 8 years
	Interest is paid semi annyally so total period = 8 Years * 2 = 16 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 9%
	Bonds interest is paid semi annualy means so discounting factor = 9 % /2= 4.5 %
	PVF = 1 / Discount rate = 1/ 1.045
	Result of above will again divide by 1.045 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF @ 4.5%	PresentValue
	1	Interest	$40.00	0.9569	$38.28
	2	Interest	$40.00	0.9157	$36.63
	3	Interest	$40.00	0.8763	$35.05
	4	Interest	$40.00	0.8386	$33.54
	5	Interest	$40.00	0.8025	$32.10
	6	Interest	$40.00	0.7679	$30.72
	7	Interest	$40.00	0.7348	$29.39
	8	Interest	$40.00	0.7032	$28.13
	9	Interest	$40.00	0.6729	$26.92
	10	Interest	$40.00	0.6439	$25.76
	11	Interest	$40.00	0.6162	$24.65
	12	Interest	$40.00	0.5897	$23.59
	13	Interest	$40.00	0.5643	$22.57
	14	Interest	$40.00	0.5400	$21.60
	15	Interest	$40.00	0.5167	$20.67
	16	Interest	$40.00	0.4945	$19.78
	16	Bond Principal Value	$1,000.00	0.4945	$494.47
		Total
		Current Bonds Price =			$943.83
		Value of the Bond = $ 943.83