Question

A bond that matures in 12 years has a $1,000 par value. The annual coupon interest rate is 11 percent and the market's required yield to maturity on a comparable-risk bond is 18 percent. What would be the value of this bond if it paid interest annually? What would be the value of this bond if it paid interest semiannually?

Answer 1

1.Information provided:

Par value= future value= $1,000

Time= 12 years

Coupon rate= 11%

Coupon payment= 0.11*1,000= $110

Yield to maturity= 18%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 12

PMT= 110

I/Y= 18

Press the CPT key and PV to compute the present value.

The value obtained is 664.47.

Therefore, the price of the bond of an annual bond is $664.47.

2. Information provided:

Par value= future value= $1,000

Time= 12 years*2= 24 semi-annual periods

Coupon rate= 11%/2= 5.50%

Coupon payment= 0.055*1,000= $55

Yield to maturity= 18%/2= 9%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 24

PMT= 55

I/Y= 9

Press the CPT key and PV to compute the present value.

The value obtained is 660.27.

Therefore, the price of the bond of an annual bond is $660.27.

In case of any query, kindly comment on the solution.