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

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) ?

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.

jeff jeffy answered 1 year ago

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