Question

Calculate the present value for both bond a and b:

Commercial Bond a in Market 1

The other features of the Bond are as follows: Par value: $2000
Coupon rate: 10%
Coupon rate compounding interval: semi-annual

Current market rate of similar Bond: 11%

Year to maturity: 10 years Ans: 1880.50

Commercial Bond b in Market 2

The other features of the Bond are as follows: Par value: $2000
Coupon rate: 8%
Coupon rate compounding interval: monthly

Current market rate of similar Bond: 7%

Year to maturity: 10 years Ans: 2143.54

(a) A recent University graduate John has joined your team. You have asked John to calculate the present value of both Commercial Bond 1 and 2. John submitted his calculations as follows: Present value of Commercial Bond 1 $1882.22 and 2 $2140.47. Are John’s calculations correct? Where has he gone wrong?

Answer 1

Hello Sir/Mam

Commercial Bond A

Commercial Bond B

(a) Both of the John's Calculations are incorrect. THe correct PVs are $1,880.50 and $2,143.54.

John, while doing calculations, ignored the compounding concept and hence, got the Present Values $1,882.22 and $2,140.47. He should consider compunding concept and its impact on coupon payment, YTD and number of periods to get the correct calculation.

I hope this solves your query.

Do give a thumbs up if you find this helpful.