Question

XYZ Inc. has issued a 15-year bond that pays quarterly with a 4% coupon rate and a 5% market rate. What is the future value of the bond?

PV

FV

PMT

N

I

Answer 1

Ans =

- FV = face value of bond that bond pay at the time of redemption. Generally bond trade at face value of 1000. Therefore FV is 1000.

- N= time at which bond will be redeemed. As the bond is paying coupon Quarterly, therefore N = time to maturity x 4. N= 15 x 4 = 60   

- PMT is the coupon amount paid by the bond at regular intervals. As bond is paying coupon Quarterly, therefore PMT = annual coupon amount / 4. Annual coupon amount= 4% x face value(1000)= 40 , PMT = 40 / 4 = 10.

- I is the yield or market rate. For Quarterly bond we have to divide market rate by 4, therefore I/Y = 5% / 4 = 1.25%.

- PV is the present value of bond at which bond is selling currently. PV of bond= PV of all coupon + PV of FV.

- PV of bond= 10 / (1+ 0.0125)1 + 10 /(1.0125)2 +...till..+ 10/(1.0125)60  + 1000 / (1.0125)60 = 894.91.

# it's easy to compute on a financial calculator by putting values as follows:-    N=60, FV=1000,    PMT=10, I/Y= 1.25, then press CPT and then PV, You will get PV of 894.91.