Question

In: Finance

Aminah has just bought a bond that will mature in 7 years for RM 800, with...

  1. Aminah has just bought a bond that will mature in 7 years for RM 800, with RM 1000 par value and coupon rate of 8% paid semiannually. What should the value of this bond be if the required return on similar-risk bonds is 12% per year ( 6% paid semiannually) ?

Solutions

Expert Solution

Par/Face value 1000
Annual Coupon rate 0.08
Annual coupon 80
semi-annual coupon 40
Present Value = Future value/[(1+(r/m))^mt]
r is the interest rate that is 12%.
m is the compounding period that is 2
mt is the time period.
price of the bond = sum of present values of future cash flows
r/2 0.06
mt 1 2 3 4 5 6 7 8 9 10 11 12 13 14
future cash flow 40 40 40 40 40 40 40 40 40 40 40 40 40 1040
present value 37.73585 35.59986 33.58477 31.68375 29.89033 28.19842 26.60228 25.09649 23.67594 22.33579 21.0715 19.87877 18.75356 459.993
sum of present values 814.10
The value of this bond should be RM 814.10.

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