Question

A bond with a face value of $1000 made a payment earlier today and has exactly...

A bond with a face value of $1000 made a payment earlier today and has exactly 2 years left until it matures. The bond makes semi-annual payments of $40 each. Currently, the interest rate on newly-issued, same-risk bonds is 8.62%. What is the value of this bond?

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Answer #1

Value of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Value of bond is calculated using PV function in Excel :

rate = 8.62%/2 (Semiannual YTM of bonds = annual YTM / 2)

nper = 2 * 2 (2 years remaining until maturity with 2 semiannual coupon payments each year)

pmt = 40 (semiannual coupon payment2)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $988.83

Value of bond is $988.83

Value of bond is $988.83

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