Question

A bond with a par value of P5,000 and with a bond rate of 9% payable annually is sold now for P5,100. If the yield is to be 12%, how much should the redemption price be at the end of 10 years?

Answer 1

We can plot the cash flows from this bond and solve as follows:

Time	Coupon	Redemption	Total CF	PV @ 12% = Total CF / 1.12^Time	PV Factor = 1/1.12^Time
1	450.00		450.00	401.79	0.89286
2	450.00		450.00	358.74	0.79719
3	450.00		450.00	320.30	0.71178
4	450.00		450.00	285.98	0.63552
5	450.00		450.00	255.34	0.56743
6	450.00		450.00	227.98	0.50663
7	450.00		450.00	203.56	0.45235
8	450.00		450.00	181.75	0.40388
9	450.00		450.00	162.27	0.36061
10	450.00		450.00	144.89	0.32197
			Total	2,542.60

You see that the PV of this bond without any redemption value is $2542.60. We need to find redemption value such that redemption value times the PV factor for year 10 equals $5100-$2542.60

So, 0.32197 * redemption value = $2557.40

hence redemption value = $2557.40/0.32197 = $7942.89