A ten-year bond, with par value equals $1000, pays 10% annually. If similar bonds are currently...

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..

Expert Solution

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
		=	100010%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

jeff jeffy answered 1 year ago

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