A corporate bond has a face value of $1000 with a maturity date 20 years from today. The bond pays interest semiannually at a rate of 8% based on the face value (this means 8%/yr/semi). The interest rate paid on similar corporate bonds has decreased to a current rate of 6%/yr/semi (this would be i – the yield rate). What is the market value of this bond, or what should an investor pay for the bond?
Face value = 1000
Coupon rate = 8%
Interest is paid semi-annually.
Coupon payment = (1000 * 0.08)/2 = 40
Market interest rate = 6% per annum compounded semi-annually
Since, market interest rate is compounded semi-annually.
Adjusted market interest rate = 6%/2 = 3%
Adjsted time period = 20 * 2 = 40
Calculate Bond Price -
Bond Price = PV of interest payment + PV of face value
Bond Price = 40(P/A, 3%, 40) + 1000(P/F, 3%, 40)
Bond Price = (40 * 23.1148) + (1000 * 0.3066)
Bond Price = 924.59 + 306.6
Bond Price = 1,231.19
The market value of this bond is $1,231.19
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