Question

What is the market value of the following bond?

Coupon 9%

Maturity date 2028

Interest paid semiannually

Par Value $1000

Market interest rate 8%

Answer 1

Step 1: Determine the number of years to maturity. Consiering 2020 as the current year, we subtracted 2020 from 2028 to arrive at number of years, which is 16. Note: This is annual base year and the question requirement is semi-annual. Therefore, further calculation is to be done.

Step 2: Determin semi-annual base interest rate. Divide interest rate of 9% by 2 (9%/2) to arrive at semi-annual rate of 4.5%

Step 3: Multiply annual base year by 2 to arrive at number of periods (16*2) = 32

Step 4: Find interest payment by multiplying $1,000 by the semi-annual rate (4.5%) to arrive at an interest value of $45.

Step 5: Divide market interest rate by 2 (8%/2) to arrive at 4% semi-annual rate

Step 6: No plug in all these values into an excel formula PV (RATE, NPER, PMT, FV), for example PV(4%,32,45,1000)

 

Coupon			4.5%
Maturity date			16
Interest paid semiannually			$ 45.00
Par Value			$ 1,000.00
Market interest rate			4%
	Market Value of the bond			($1,058.26)

Market Value of the bond ($1,058.26)