In: Finance
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.
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.