Question

4. A nine-year REl corporate bond has a 7% coupon rate. What is the current market price of the bond if the expected return is 6.9% and the required rate of return is 6% and the bond pays interest semiannually? Round to three decimal places and omit the dollar sign ($) .

Answer 1

Let us assume the bond face value is to be 1000

Coupon rate is 7% paid semiannualy so periodic interest is 3.5%

Bond value when expected return is 6.9%

Per period interest is 3.45

No of periods 9×2 = 18

Bond value is present value of cash flows

= 35(PVIFA3.45% 18p) + 1000(PVIF 3.45% 18p)

= 35(13.244) + 1000(0.5431)

= 1006.1

When expected rate is 6%

Per period interest rate 3%

Value of bond

= 35(PVIFA 3% 18p) + 1000(PVIF 3% 18p)

= 35(13.7535) + 1000(0.5874)

= 1068.77