Question

One of IBM's bond issues has an annual coupon rate of 4.3%, a face value of $1,000 and matures in 8 years.

What is the value (or price) of the bond if the required return is 5%?

What is the value of the bond if the required return is 6%?

What is the value of the bond if the required return is 7%?

Answer 1

Answer : Calculation of Value of Bond  if the required return is 5%

Given Face Value of Bond = $1,000

Coupon Rate = 4.3%

Annual Coupon = 1,000 *4.3%

= $43

Value of Bond = [Annual Coupon * Present value Annuity @ 5% for 8 years + Face Value] * [Present Value Factor @ 5% for year 8]

= [ 43 * 6.46321275929 ] + [1,000 * 0.676839362]

= $ 954.7575 or $ 954.76

Calculation of Value of Bond  if the required return is 6%

Given Face Value of Bond = $1,000

Coupon Rate = 4.3%

Annual Coupon = 1,000 *4.3%

= $43

Value of Bond = [Annual Coupon * Present value Annuity @ 6% for 8 years + Face Value] * [Present Value Factor @ 6% for year 8]

= [ 43 * 6.20979381074 ] + [1,000 * 0.6274123713]

= $ 894.4335 or $ 894.43

Calculation of Value of Bond  if the required return is 7%

Given Face Value of Bond = $1,000

Coupon Rate = 4.3%

Annual Coupon = 1,000 *4.3%

= $43

Value of Bond = [Annual Coupon * Present value Annuity @ 7% for 8 years + Face Value] * [Present Value Factor @ 7% for year 8]

= [ 43 * 5.97129850606 ] + [1,000 * 0.58200910453]

= $ 838.7749 or $ 838.77