Question
In: Finance
Find the value of a bond maturing in 7 years, with a $1 comma 000 par...
Find the value of a bond maturing in 7 years, with a $1 comma 000 par value and a coupon interest rate of 9 % (4.5 % paid semiannually) if the required return on similar-risk bonds is 16 % annual interest left parenthesis 8 % paid semiannually).
The present value of the bond is:
Solutions
Expert Solution
| Given : | |
| Face Value of Bond = | $ 1,000.00 |
| Coupon rate semi annual | 4.50% |
| Semi annual Coupon Payment | $ 45.00 |
| Semi Annual Market yield | 8% |
| No of semi annual periods till maturity = | 14 |
| PV Annuity factor for 14 periods @8%=(1-1.08^-14)/8%= | 8.24424 | |
| PV discount factor for 14 periods @8% =1/1.08^14= | 0.34046 | |
| We can find the PV of Bond by finding the PV of future cash flows from the bond. |
| Cash flow | Amt $ | PVA /PV factor | PV of Cash flows=a*b |
| Semi annual coupon payments for 14 periods | $ 45.000 | 8.244237 | 370.99 |
| Maturity value receivable after 14 semi annual periods | $ 1,000.00 | 0.3404610 | 340.46 |
| PV of Total Cash flows = | 711.45 | ||
| So Current Bond Price is $711.45 |
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