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.

Umair answered 1 year ago

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