A bond has a par value of R500 and a coupon rate of 16%. Similar bonds...

A bond has a par value of R500 and a coupon rate of 16%. Similar bonds have a required return of 18% annually.

Interest is paid semi-annually. An investment into these bonds has 13 years to maturity. Calculate how much

An investor can pay on these bonds today.

Solutions

Expert Solution

Formula for bond price is:

Bond price = C x [1 – (1+r)-n/r] + F/(1+r) n

F = Face value = R 500

C = Periodic coupon payment = Face value x Coupon rate/Annual coupon frequency

= R 500 x 0.16/2 = R 500 x 0.08 = R 40

r = Rate of return = 0.018/2 = 0.09 semi-annually

n = Number periods to maturity = 2 x 13 years = 26 periods

Bond price = R 40 x [1 – (1+0.09)-26]/0.09 + R 500/ (1+0.09) 26

= R 40 x [1 – (1.09)-26]/0.09 + R 500 x (1.09) -26

= R 40 x [(1 – 0.106392509683152)]/0.09 + R 500 x 0.106392509683152

= R 40 x (0.893607490316848/0.09) + R 53.1962548415762

= R 40 x 9.92897211463164 + R 53.1962548415762

= R 397.158884585266 + R 53.1962548415762

= R 450.355139426842 or R 450.36

An investor can pay R 450.36 on these bonds today.

jeff jeffy answered 1 year ago

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