Question

1. Ezekiel Limited issued a bond with a par value of $ 20,000, coupon rate of 8% p.a. and a maturity period of 12 years. Create a model showing the interest and principal repayment separately and calculate the value of the bond when the required rate of return is 10% if:

1. Interest is paid annually.   
2. Interest is paid semi-annually.
3. What would be the value of the bond when the required rate of return is 7.5% payable semi-annually and with a maturity of 8 years?                      

Answer 1

(i) If interest is paid annually:

Par value	20000
Coupon rate	8.00%
Maturity(Years)	12
Required rate of Return	10.00%
Compounding periods of req. rate in a year	1
Effective annual required rate	10.0000%
Coupon payment frequency in a year	1
Value of Bond	($17,274.52)

(ii)if interest is paid semiannually:

Par value	20000
Coupon rate	8.00%
Maturity(Years)	12
Required rate of Return	10.00%
Compounding periods of req. rate in a year	1
Effective annual required rate	10.0000%
Coupon payment frequency in a year	2
Value of Bond	($17,240.27)

(iii)required rate 7.5% compounded semiannual, Maturity 8 years:

Par value	20000
Coupon rate	8.00%
Maturity(Years)	8
Required rate of Return	7.50%
Compounding periods of req. rate in a year	2
Effective annual required rate	7.6406%
Coupon payment frequency in a year	1
Value of Bond	($20,418.73)

(iv) (from my side)

required rate 7.5% compounded semiannually, maturity 8 years, coupon frequency semiannually:

Par value	20000
Coupon rate	8.00%
Maturity(Years)	8
Required rate of Return	7.50%
Compounding periods of req. rate in a year	2
Effective annual required rate	7.6406%
Coupon payment frequency in a year	2
Value of Bond	($20,424.36)

Showing of formula:

Fill the values in the gray boxes and apply the formula as shown above and you will get the value of bond:

Feel free to ask further querries via comments.

Kindly upvote if you like my solution.

Good Luck!