Question

Calculate the value of a​ $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similarminusrisk bonds is 20 percent.

Answer 1

Answer:

$656.82

Explanation:

The calculation of  required return is shown below:-

Face value (FV) = $1,000

Coupon rate = 12.00%

Number of compounding periods per year = 4

Interest per period (PMT) = $1,000 × 12.00 ÷ 4

= $30.00

Number of years to maturity = 10

Number of compounding periods till maturity (NPER) = Number of compounding periods per year × Number of years to maturity

= 40

Required rate of return = 20.00%

Required rate of return per period (RATE) = 5.00%

Bonds value = -PV(RATE,NPER,PMT,FV)

= $656.82

Therefore we applied this formula into excel.