Find the value of a bond maturing in 6 years, with a $1,000 par value and a coupon interest rate of 14% (7% paid semi-annually) if the required return on similar-risk bonds is 17% annual interest (8.5% paid semi-annually).
The present value of the bond is?
Answer: $7,720.39
Calculations:
Issued at Discount | |
Face value | $ 1,000 |
Coupon Rate | 14% |
Market rate | 17% |
Tenure | 6 years |
Tenure Semi annualy | 12 years |
*Interest payment = $1000 x 10% = $100
Present value of interest payment | $ 7,344.69 |
[$1000 x 7.34469 PV annuity factor at 8.5% for 12 years] | |
Prsent value of face value | $ 375.70 |
[$1,000 x 0.37570 PV factor at 8.5% for 12 years] | |
Issue price | $ 7,720.39 |
Note: The present value of annuity factor taken rounded to 5 decimals.
*Answer was taken rounded to two decimals
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