Question

A bond that matures in 16 years has a ​$1000 par value. The annual coupon interest rate is 13 percent and the​ market's required yield to maturity on a​ comparable-risk bond is 18 percent. What would be the value of this bond if it paid interest​ annually? What would be the value of this bond if it paid interest​ semiannually?

Answer 1

To calculate the price of the bond, we will use PV function in excel. Price of the bond is basically the present value of all the future cash flows.

The interest rate will be equal to yield to maturity = 18%

For Annual Payments, in PV formula

rate = 18%

nper = 16 (16 years)

PMT = 130 (coupon payment 13%)

FV = 1000 (face Value)

The price of the bond calculated is $ 741.88

For Semi annual payment, In PV

rate = 9% (semi annual)

nper = 32 (16*2 semi annual period)

PMT = 65 (semi annual coupon payment 13%/2)

FV = 1000 (face Value)

The price of the bond calculated is $ 739.84

The sign for FV and PMT is taken negative to get positive sign of PV as they are in opposite direction (cash flow)