Question

The WeLoveandKnowThisStuff Company issued a $1,000 par value, 7.5% coupon, 6 year bond. The interest is paid semiannually and the market is currently requiring 4.8% on this risk level bond. What is the current value of the bond?

SHOW ALL WORK USING THE TI BAII PLUS CALCULATOR!

Answer 1

The current value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 7.5% / 2 x $ 1,000 (Since the payments are semi annually, hence divided by 2)

= $ 37.50

The YTM is computed as follows:

= 4.8% / 2 (Since the payments are semi annually, hence divided by 2)

= 2.4%

N is computed as follows:

= 6 x 2 (Since the payments are semi annually, hence multiplied by 2)

= 12

So, the current value of the bond will be as follows:

Plug the below figures in the financial calculator

In CF0 = 0

In C01 = 37.50

Then press down arrow key and in F01 press 11

Then in C02 plug the figure

= 37.50 + 1,000

= 1,037.50

In F02, plug 1

Then press NPV key, it will ask for I/Y, in which we shall enter 2.4

Then finally press down arrow key and then press CPT key. It will give value of the bond equal to

= $ 1,139.32 Approximately

Feel free to ask in case of any query relating to this question