Question

 Calculate the value of the bond shown in the following​ table, assuming it pays interest annually.

Par value	Coupon interest rate	Years to maturity	Required return
​$1,000	8​%	20	16%

A. The value of the bond is what????

Answer 1

The value of the bond is computed as shown below:

= Present value of coupon payments + Present value of par value

The coupon payment is computed as follows:

= 8% x $ 1,000

= $ 80

So, the value of the bond will be as follows:

= $ 80 / 1.16¹ + $ 80 / 1.16² + $ 80 / 1.16³ + $ 80 / 1.16⁴ + $ 80 / 1.16⁵ + $ 80 / 1.16⁶ + $ 80 / 1.16⁷ + $ 80 / 1.16⁸ + $ 80 / 1.16⁹ + $ 80 / 1.16¹⁰ + $ 80 / 1.16¹¹ + $ 80 / 1.16¹² + $ 80 / 1.16¹³ + $ 80 / 1.16¹⁴ + $ 80 / 1.16¹⁵ + $ 80 / 1.16¹⁶ + $ 80 / 1.16¹⁷ + $ 80 / 1.16¹⁸ + $ 80 / 1.16¹⁹ + $ 80 / 1.16²⁰ + $ 1,000 / 1.16²⁰

= $ 525.69 Approximately

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