Question

Mr. Zinedine Zidane received a bonus for winning the XI Champions League and
wants to invest in the bond market. A bond is advertised in the newspaper, the face value is
$50,000, with a bond rate of 8% payable semiannually. The bond original life was 10 years but
the bond holder has received the payments for the first two years. Mr. Zidane time value of
money is 10% per year, how much should he pay for the bond in order to achieve his TVOM?

Answer 1

Semi-annual coupon = Face value x Semi-annual interest rate = $50,000 x (8%/2) = $2,000

Semi-annual discount rate = 1%/2 = 5%

Number of years left to maturity = 10 - 2 = 8

Number of compounding periods to maturity = 8 x 2 = 16

Bond price ($) = Present value of future coupon interests + Present value of redemption price (face value)

= 2,000 x P/A(5%, 16) + 50,000 x P/F(5%, 16)

= 2,000 x 10.8378** + 50,000 x 0.4581**

= 21,675.6 + 22,905

= 44,580.6

**From P/A and P/F Factor tables