Question

Bond Valuation

All bonds have a $1,000 face or par value unless otherwise stated. k_c is the coupon rate and k_dis the market cost of debt.

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond?  

Answer 1

The amount is computed as follows:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

r will be as follows:

= 12% / 4 (As the payments are on quarterly basis, hence divided by 4)

= 3% or 0.03

n is computed as follows:

= 10 x 4 (As the payments are on quarterly basis, hence multiplied by 4)

= 40

So, the amount will be as follows:

= $ 35 x [ [ (1 - 1 / (1 + 0.03)⁴⁰ ] / 0.03 ] + $ 1,000 / 1.03⁴⁰

= $ 35 x 23.11477197 + $ 306.5568408

= $ 1,115.57 Approximately

Do ask in case of any doubts.

answered by: anonymous