Question

A 8-year bond with a face value of $1000 pays semi-annual coupons at j₂= 10.2%. If the bond sells for $1272.59 to yield an investor j₂= 7.1%, what is the redemption value?

Answer 1

Price of bond = Present value of coupon + Present value of redemption value

1272.59 = [1000 X 5.1% X PVAF (3.55%,16)] + [RV x PVIF(3.55%,16)]

1272.59 = (51 x 12.04883) + (RV x 0.49773)

1272.59 = 614.49 + (RV x 0.49773)

RV = (1272.59 – 614.49) / 0.49773

RV = 658.1 / 0.49773

RV = 1322.20

Redemption value is 1322.20

Calculation of PVAF (3.55%,16)] is as follows:

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