Question

A ten-year bond, with par value equals $1000, pays 10% annually. If similar bonds are currently yielding 6% annually, what is the market value of this bond? Use semi-annual analysis. Please show all work and no financial calculators are allowed for the problem..

Answer 1

Value of bond is the present value of cash flows from bond.
Present value of coupon			$       50.00	x	14.877475	=	$     743.87
Present value of Par value			$ 1,000.00	x	0.5536758	=	$     553.68
Present value of cash flows from bond							$ 1,297.55
So, bond's current selling price is			$ 1,297.55
Working:
# 1	Semi annual coupon interest	=	Par Value * Semi annual coupon rate
		=	1000*10%*6/12
		=	$       50.00
# 2	Present value of annuity of 1	=	(1-(1+i)^-n)/i			Where,
		=	(1-(1+0.03)^-20)/0.03			i	6%/2	=	0.03
		=	14.877475			n	10*2	=	20
# 3	Present value of 1	=	(1+i)^-n
		=	(1+0.03)^-20
		=	0.5536758