Question

Mr. Koh purchases a RM1,000 par value 10-year bond with coupons at 8% convertible semiannually which will be redeemed for x. The present value of the redemption value is RM301.51. Calculate x if the purchase price is RM800.

Answer 1

Sol :

Par value = RM1,000

Coupon rate (r) = 8% (Semiannualy) = 8%/4 = 2%

Period (n) = 10 year (Semiannualy) = 10 x 4 = 40

Redemption value (x) = Present Value / (1 - (1+r)^-n/r) - (1 - (1+r)^-n-1/r)

Redemption value (x) = RM301.51 / (1 - (1 + 2%)^-40/r) - (1 - (1 + 2%)^-40-1/r)

Redemption value (x) = RM301.51 / (1 - (1 + 0.02)^-40/0.02) - (1 - (1 + 0.02)^-40-1/0.02)

Redemption value (x) = RM301.51 / (27.35547924 - 26.90258883)

Redemption value (x) = RM301.51 / 0.45289041

Redemption value (x) = RM665.7460 or RM665.75

Therefore Redemption value (x) will be RM665.75