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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