Question

The Aseri Insurance company purchases corporate bonds in the secondary market with 6 years to maturity. Total par value is $55 million. The coupon rate is 10% with annual interest payments. If the expected required rate of return in 4 years is 8%, what will the market
value of the bonds be then;

Answer 1

In 4 years, the rate of return is 8%

After 4 years, time to maturity would be 6 - 4 = 2

Bond present value after 4 years = Coupon / (1 + I)^1 + Coupon / (1 + I)^2 + Face Value / (1 + I)^2

Coupon = 55 million * 10% = 5.5 million

Bond PV = 5.5 / (1 + 8%)^1 + 5.5 / (1 + 8%)^2 + 55 / (1 + 8%)^2

= 56.96 Million Dollars