Determine the market price of a $209,000, 10-year, 8% (pays interest semiannually) bond issue sold to...

Determine the market price of a $209,000, 10-year, 8% (pays interest semiannually) bond issue sold to yield an effective rate of 10%.

Expert Solution

Market price of a bond can be easily calculated by plotting the interests in an excel sheet. The logic is the Yield should be the effective rate. I am giving below the step step by calculation to understand the concept.

Take the Face value of the bond as investment on 1/1/18

Plot the interest on face value semi annually

Use the formulae XIRR in excel to calculate the yield on face value. The yield will be slightly higher since the interest payment happen semi annual

Use the goal seek function in excel to set the xirr cell value to 10% by changing the face value. I am pasting below the excel workings so that you can try.

FV	209000
Tenure	10
Interest	8%
Effective rate	10%


		01-01-2018	30-06-2018	31-12-2018	30-06-2019	31-12-2019	30-06-2020	31-12-2020	30-06-2021	31-12-2021	30-06-2022	31-12-2022	30-06-2023	31-12-2023	30-06-2024	31-12-2024	30-06-2025	31-12-2025	30-06-2026	31-12-2026	30-06-2027	31-12-2027
		-186010
			8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360
																						209000
		-186010	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	8360	217360
		9.98%

As can be seen above the market value of the bond is $186010

ekkarill92 answered 2 years ago

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