Question
<em>How would you value a 1000 bond with 10% coupon rate?</em>
<em>Assuming the bonds is repayable in five (5) years time with a yield of 11% per annum.</em>
Answer:
Value of bond = $948.54
Explanation:
<em>The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV). </em>
Value of Bond = PV of interest + PV of RV
The value of bond of the can be worked out as follows:
Step 1
<em>PV of interest payments </em>
<em>
</em>Annul interest payment<em> </em>= 10% × 1000 = 100
Annual yield = 11%
Total period to maturity (in years) = 8 years
PV of interest =
100 × (1- 1.11^(-8)/)/ 0.11 = 514.612
Step 2
<em>PV of Redemption Value</em>
= 1,000 × (1.11)^(-8) = 433.926
Step 3
<em>Price of bond </em>
= 514.612
+ 433.926 = 948.539
Value of bond = $948.54
