Question

What is the market value of the following bond?

Coupon 8%

Maturity date 2038

Interest paid semiannually

Par Value $1000

Market interest rate 10%

Answer 1

Step 1: Determine the number of years to maturity. Consiering 2020 as the current year, we subtracted 2020 from 2038 to arrive at number of years, which is 36. 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 8% by 2 (8%/2) to arrive at semi-annual rate of 4%

Step 3: Multiply annual base year by 2 to arrive at number of periods (36*2) = 72

Step 4: Find interest payment by multiplying $1,000 by the semi-annual rate (4%) to arrive at an interest value of $40.

Step 5: Divide market interest rate by 2 (10%/2) to arrive at 5% semi-annual rate

Step 5: No plug in all these values into an excel formula PV (RATE, NPER, PMT, FV), for example PV(5%,72,40,1000)

 

 

Coupon			4%
Maturity date			36
Interest paid semiannually			$ 40.00
Par Value			$ 1,000.00
Market interest rate			5%
	Market Value of the bond			($834.53)

($834.53)