Question

Bond valuationlong dashSemiannual interest Find the value of a bond maturing in 4 ​years, with a ​$1 comma 000 par value and a coupon interest rate of 9​% ​(4.5​% paid​ semiannually) if the required return on​ similar-risk bonds is 15​% annual interest (7.5 % paid​ semiannually).

Answer 1

Answer:

824.28

Explanation:

Market price of a bond is the total sum of discounted coupon cashflow and par value at maturity. This is a 4-year bond with semi-annual payment so there will be 8 coupon payment in total. Let formulate the bond price as below:

Bond price = [(Coupon rate/2) x Par]/(1 + Required return/2) + [(Coupon rate/2) x Par]/(1 + Required return/2)^2 + ... + [(Coupon rate/2) x Par + Par]/(1 + Required return/2)^8

Putting all the number together, we have

Bond price = [(4.5%) x 1000]/(1 + 7.5%) + [(4.5%) x 1000]/(1 + 7.5%)^2 + ... + [(4.5%) x 1000 + 1000]/(1 + 7.5%)^8

                  = 824.28