Question

A $1,000 par-value bond with 5 years of maturity pays a 5% coupon rate, paid annually. What is the value of the bond if your required rate of return is 5%?

2. A $1,000 par-value bond with 5 years of maturity pays a 5% coupon rate, paid semi-annually. What is the value of the bond if your required rate of return is 5%?

3.  A $1,000 par-value bond with 5 years of maturity pays a 5% coupon rate, paid semi-annually. What is the value of the bond if your required rate of return is 7%?

4.   A $1,000 par-value bond with 5 years of maturity pays a 5% coupon rate, paid semi-annually. What is the value of the bond if your required rate of return is 3%?

Answer 1

Value of Bond is calculated as follows,

Value of Bond =(C*((1-(1+r)^-n)/r))+(F/(1+r)ⁿ)

Where,

C means Coupon payments

r means TYM

n means no. of years till maturity

F means Face value

1. Value Value of Bond =(C*((1-(1+r)^-n)/r))+(F/(1+r)ⁿ)

Value of Bond =((1000*0.05)*((1-(1+0.05)^-5)/0.05))+(1000/(1+0.05)⁵)

Value of Bond =1000

2. Value Value of Bond =(C*((1-(1+r)^-n)/r))+(F/(1+r)ⁿ)

Value of Bond =((1000*(0.05/2))*((1-(1+(0.05/2))^(-5*2))/(0.05/2)))+(1000/(1+(0.05/2))^(5*2))

Value of Bond =1000

3. Value Value of Bond =(C*((1-(1+r)^-n)/r))+(F/(1+r)ⁿ)

Value of Bond =((1000*(0.05/2))*((1-(1+(0.07/2))^(-5*2))/(0.07/2)))+(1000/(1+(0.07/2))^(5*2))

Value of Bond =916.83

4. Value Value of Bond =(C*((1-(1+r)^-n)/r))+(F/(1+r)ⁿ)

Value of Bond =((1000*(0.05/2))*((1-(1+(0.03/2))^(-5*2))/(0.03/2)))+(1000/(1+(0.03/2))^(5*2))

Value of Bond =1092.22