Question

In: Finance

Calculate the value of the bond shown in the following table, assuming it pays interest annually.

Calculate the value of the bond shown in the following table, assuming it pays interest annually.

Par value

Coupon interest rate

Years to maturity

Required return

$1,000

13%

20

6%

The value of the bond is $________

Formula without using excel.

Solutions

Expert Solution

Value of bond (B0= Periodic coupon payment * [1-(1+r)^-n ] / r + Par value / (1+r)^n

Where r is the required return and n is the number of years.

 

Calculation of value of the bond.

Periodic coupon payment = Par value * coupon rate = $1000 * 13% = $130.

r = 6% and n = 20.

B0 = $130 * [1-(1+6%)^-20 ] / 6% + $1000 / (1+6%)^20

     = $1,491.09 + $311.80 

     = $1,802.89. (approx.).

 

Therefore the value of the bond is approx. $1,802.89.


Therefore the value of the bond is approx. $1,802.89.

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