Question

Cullumber, Inc., has issued a three-year bond that pays a coupon rate of 8.0 percent. Coupon payments are made semiannually. Given the market rate of interest of 4.6 percent, what is the market value of the bond? (Round answer to 2 decimal places, e.g. 15.25.)

Answer 1

CALCULATION OF THE VALUE OF THE BOND INTEREST IS PAID SEMI ANNUALLY
Step 1 : Calculation of Semi Annual Coupon Payments
Assume Par value of the bond issued is   =			$1,000
Annual Coupon %			8.00%
Annual Coupon Amount			$80
Semi Annual Coupon Amount			$40
Step 2: Calculate number of years to Maturity
Number of years to maturity = 3 years
Interest is paid semi annyally so total period = 3 Years * 2 = 6 Periods
Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
Market rate of interest or Yield to Maturity or Required Return = 4.6%
Bonds interest is paid semi annualy means so discounting factor = 4.6 % /2= 2.3 %
PVF = 1 / Discount rate = 1/ 1.023
Result of above will again divide by 1.023 , repeat this lat period
Period	Interest	Amount (In Million)	PVF @ 2.3%	PresentValue
1	Interest	$40	0.9775	$39.10
2	Interest	$40	0.9555	$38.22
3	Interest	$40	0.9341	$37.36
4	Interest	$40	0.9131	$36.52
5	Interest	$40	0.8925	$35.70
6	Interest	$40	0.8725	$34.90
6	Interest	$1,000	0.8725	$872.46
	Total			$1,094.27
	Market Value of Bonds Price =			$1,094.27
SIMULTANEOUSLY WE CAN SOLVE WITH BELOW METHOD
OR		Cumulative value of $ 1 @ 2.3% in 6 Periods
Interest	$40.00	5.5452	221.81
Par Value at 30th Period	$1,000	0.8725	872.46
Market Value of Bonds Price =			1,094.27